Shares of the SPDR Gold Trust ETF (NYSEARCA:GLD) are nearing seven-year highs on heightened tensions in the Mideast. GLD is the largest gold-backed ETF in the world and offers investors a way to gain exposure to gold in their stock accounts.
GLD has rallied 11 out the past 12 days as a weaker dollar and heightened Mideast tensions provided a constructive backdrop. Like all good things, though, it appears the rally may be coming to an end, at least short term. Gold will likely lose some luster over the coming weeks.
GLD Stock Chart
Source: The thinkorswim® platform from TD Ameritrade
GLD is getting decidedly overbought on a technical basis. 14-day RSI now sits near the highest readings in the past three years as it approaches 85. Prior instances when gold was this exuberant marked significant short term tops in the price of gold.
MACD is fast approaching the most extreme levels in that same time period, another sign that the rally may be getting overdone. Bollinger Percent B is back above 1, which signals that a price move is getting stretched. GLD is trading at a big premium to the 100-day moving average which has led to pullbacks to the average in the past.
More importantly, GLD finally ran into some resistance yesterday. After opening near the highs of the day at $148.44, the gold ETF quickly reversed course. GLD closed well off the highs and near the lows of the day at $147.39.
This type of price action is many times a sign that the rally may finally be coming to an end. The buyers are exhausted and the sellers have taken control. It is even more powerful given the magnitude of the recent rally in gold.
Gold Stocks Moving Forward
Shorting gold futures, or even GLD, can be risky in this market environment. Any unforeseen occurrence could propel gold sharply higher and provide some severe short term angst for those short the yellow metal. Luckily the options market provides a risk-defined way to take a guardedly bearish short term position on gold.
Implied volatility (IV) has spiked sharply over the past several days. Unlike stocks, commodities tend to have IV rise in up markets and contract in down markets. This recent run up in IV is a further indication that the rally may have gotten a little too rambunctious. It also means option prices are comparatively more expensive. This favors selling strategies when constructing trades.
Option traders should consider selling the February $153/$156 bear call spread for a 45 cents net credit. Maximum gain on the trade is $45 per spread with maximum risk of $255 per spread. Return on risk is 17.64%. The short $153 call strike provides a 3.8% upside cushion to the $147.39 closing price of GLD.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.