Overanalyzing the markets can sometimes leave traders paralyzed, as too much data can confuse decisions and often lead to missed opportunities.

As an analyst I do my best to simplify my thought processes in order to make successful trading decisions. In regards to trading deacons regarding both gold and silver, I have tried to remain agnostic, choosing midpoints of recent ranges or identifying wedge formations to take advantage of future extreme market movement by implementing option strangles.

GOLD HAS UPSIDE POTENTIAL

However it has become apparent to me that the gold market has room to the upside due to the expectant monetary policies of the Fed and the ineptness of those managing fiscal policy in Washington. Last week’s three percent rally was a reversal of fortune for gold in my view, and this morning’s weak unemployment report may have confirmed a continued upward bias. In addition to the weakened state of the U. S. dollar, the trade this week also saw a number of economists suggesting that the economy weakened ahead of the U.S. government shutdown and therefore the expectation that next month’s unemployment report might show similar weakness for job creation. 

INDIAN PHYSICAL DEMAND

We are also coming into another Indian festival season in November that could ramp up demand for the world’s top consumer. Recent levies on gold imports this year have dampened some investment for gold this year, however with neighboring China opening their markets for OTC trading, demand has stayed strong in that important region of the world. Going forward, we could see a lag in prices as we get closer to next week’s FOMC meeting, but in my view any pullbacks in gold will become buying opportunities, as it looks like the Fed will continue to print money at their current $85 billion per month pace for the foreseeable future, with some predicting June of 2014 for the next possible change in Fed policy. 

THE TRADE

I therefore suggest the following trade to take advantage of possible market movement. I propose buying the Jan gold 1425 call and selling the Jan gold 1475 call for a purchase price of six points, or in cash value $600.00. The risk on the trade is the price paid for the call spread plus all commissions and fees. I am looking for a retest up to the three month high of 1434.00 as a possible upside target.

Reach Lusk here by e-mail.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.