On May 6th, I wrote about a head and shoulders bottom making GLD (SPDR Gold Trust) an attractive buy (the arcs on the chart indicate the head and two shoulders). Since then gold prices have sputtered and a drop in COMEX futures overnight points to a heightened risk of more downside. Net, I got this one wrong and hanging around to see if the market shapes up again is just a coin toss at this point, which is not a good trading strategy.
An Options Play
Gold futures have been consolidating since 4/24. Periods of stability tend to result in extended directional moves until the next equilibrium between supply and demand is found at a higher or lower level. So the consolidation suggests this market is still worth trading. One approach to consider here, if you’re comfortable with options, is a straddle – buying both call and put options at the same strike price and expiration month. You’re looking to buy when volatility is low and sell when volatility is high. It’s important to go with an expiration month at least a few months out in order to allow time for the market to move and the trade to work.
Moving On
Another approach is to simply take the loss on GLD and let this one go, looking to other opportunities. Psychologically, that’s often the best way to avoid overtrading and stay focused on preserving capital.
Good trading, everyone.
