The SPDR Gold Trust (ETF) (GLD) Rally Will Fizzle

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Gold prices have cobbled together a respectable rally over the past seven trading sessions. Wall Street’s go-to gold tracking fund, the SPDR Gold Trust (ETF) (NYSEARCA:GLD), is up 3%. GLD has officially recovered from its oversold status.

The SPDR Gold Trust (ETF) (GLD) Rally Will Fizzle

But with resistance looming large, short sellers are circling. If you’re bearish on the precious metal space, the time to strike is at hand.

GLD’s June swoon carried the fund back below its 50-day and 20-day moving averages, carving a lower low in the process. And while the past week’s rebound allowed the fund to remount its 20-day moving average, it remains below the falling 50-day.

The RSI indicator confirmed the momentum of gold’s downtrend. Remember, rallies following RSI confirmation in a downtrend are more appealing to fade than those that showed momentum divergence. That’s yet another reason why bears are eyeing this rally with interest.

Finally, volume patterns are lining up nicely for sellers. GLD suffered a trio of distribution days recently, suggesting heavy liquidation by the big boys. Thus far its rebound hasn’t seen any accumulation days to indicate institutions are piling back in.

Source: OptionsAnalytix

Gold bugs may contend the weakening dollar should aid the gold bounce, but the relationship between gold and the buck has been fickle this year.

In fact, the 20-day correlation between the two is at 0.56, so the pair has been more likely to move together than in opposite directions recently.

Source: OptionsAnalytix

Here’s the bottom line. If GLD rolls over here, then bear trades are worth a shot.

Turn GLD into Cash

With an implied volatility rank of 9%, GLD options are sitting on the cheap end of the spectrum. That has me leaning toward buying put spreads.

Buy the Aug $119/$116 put spread for $1.28. The max risk is limited to the $1.28 cost and will be forfeited if the gold ETF is above $119 at expiration.

The max reward is $1.72 and will be captured if it sits below $116 at expiration. To confirm gold prices are falling, you could wait until GLD takes out today’s low ($117.88) before pulling the trigger.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.

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