I chimed in on the topic of rising speculation about a tradable bottom in gold a few weeks ago, focusing on gold miners, but today we turn to the ongoing action in the SPDR Gold Shares (GLD).
The recent action in the yellow metal illustrates an interesting dynamic of price patterns: they evolve. One chart pattern often will morph into another as the supply-demand equation shifts. Chalk up the occasional morphing to the fact that market participants can be fickle creatures changing minds on a whim. In addition, trend reversals can be a messy process, with shifting winds tossing the price kite to and fro until a final direction is made manifest.
What first attracted us to the potential for a bottom in GLD — and its partner in crime, the Market Vectors Gold Miners ETF (GDX) — was the magnitude of the rebound off of the June 28 low of $114.68, coupled with how well GLD consolidated against the major resistance at $130. The narrowness of the consolidation revealed the impressive ability of buyers to absorb any and all supply being brought to market at such an obvious resistance zone.
A clean breakout above $130 would have provided a picture perfect ending to the basing pattern. But alas, the market gods had something else in store. In the days following the July 31 Fed announcement, stocks soared while gold soured, breaking below the low of the recent consolidation and thereby negating the pattern.
This is why it pays to keep an open mind with charting — anticipate all potential scenarios, as they say. Interesting enough, gold still ended up bottoming … it just came in the form of a quasi-inverted head-and-shoulders pattern (shown below).
While many might contend that the neckline was broken with yesterday’s surge, some of you trading sleuths seeking more clues before placing bets might wait until the major horizontal resistance zone at $130 gives way.
If digging for profits in gold appeals to you, consider these two plays — one conservative, one aggressive.
Sell a Sep 123-118 bull put spread for around 75 cents. The position consists of selling the Sep 123 put and buying the Sep 118 put, and will profit at expiration if GLD sits above $123. With the right shoulder resting just above $123, this is one way to essentially bet that the inverse head-and-shoulders pattern in GLD will hold firm and the right shoulder support zone will not fail.
The max risk is limited to the distance between strikes minus the net credit, or $4.25. To reduce the risk, consider exiting if GLD falls below the short strike price of $123.
If you’re looking to traverse the more aggressive route, this next spread offers a higher potential return … but also requires GLD to advance another 5% to the upside before capturing the max profit. To provide additional time, use October options instead of September.
Buy the Oct 130-135 call spread for around $1.65 by purchasing the Oct 130 call and selling the Oct 135 call. The max reward is limited to the distance between strikes minus the net debit, or $3.35, and will be captured if GLD sits above $135 at expiration. The max risk is limited to the initial debit of $1.65.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.