Will Wedge Unleash a Breakout in Gold? $GC_F

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For the better part of the last week gold has been in a wedge formation stuck between the 50- and 200- day moving averages. The 50-day moving average is at $1685.0, near the downtrend line, and the 200-day moving average is just above the middle of the wedge at $1664.0.

EYE ON THOSE LINES

It is my belief that technicians, hedge funds, and commercial interests may be watching those lines as a potential battle that could be growing inside that range for control of the next price trend that develops. I am looking for gold to make a move above or below these lines before a possible trend can be established.

There have been a few probes below $1660.0 in the last week, but so far gold has not hung there long and makes its way back up over the 200-day moving average. As long as we are still inside the wedge, gold can still move in either direction. In my view, once we get out of this wedge, the next trend should be in play. We got a 1651 price low last week and that new low could potentially be setting up for a February rally.

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MARKET COIL IS NARROWING

There are a lot of incidental things that seem to favor the upside, in my view. However, until we exit the wedge, I anticipate choppy action in gold in both directions. A wedge, in my opinion, is probably one of the most frustrating patterns and the tighter the wedge gets, the choppier it can become as both bulls and bears are fighting for control of a medium term trend.

KEY CLUES

One indicator I like to watch that could provide a clue to future price movement is the Commitment of Traders Data which is released weekly by the CFTC. Data off the chart shows a decrease in short positions in gold last week.

TRADE IDEA
I therefore am proposing the following trade. I am looking to buy the April gold 1725 call option and sell the April gold 1750 call option for a purchase price of four points or cash value of $400.00. The risk on the trade is $400.00 plus commission and fees. The maximum profit you could collect is $2,500.00, if both strikes finish in the money at option expiration, minus all commissions and fees. However, I feel a more realistic expectation or projection is that if April gold futures can surpass the $1700.0 level and trade up to $1710.0, I will look to exit the trade to collect 9 or 10 points minus commissions and fees.

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. 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.

1 Comments

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EanMendelsohn: Thank you for the informative article on Gold. There's going to be a move soon and I think it's bullish as well. I like your "trade idea"... Thanks for sharing that.
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Visitor - Sean Lusk: No Problem Mr. Mendelsohn, if you would like to receive my daily and weekly reports on Gold, please let me know. I can be contacted via email at sean.lusk@ironbeam.com
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About the Author

Sean Lusk is a registered commodity broker and Director of the Commercial Hedging Division of Walsh Trading in Chicago.  Reach Lusk via e-mail here.

 He started in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Lusk began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.

 Now, at Walsh Trading, he utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.  Contact Lusk to be added to his free daily and weekly market commentaries focusing on both the Precious Metals and Agricultural Markets along with related market activity. He is widely quoted in the media including Futures Magazine, Reuters, Forbes, Kitco, Nikkei Press, and CCTV.com

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