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.
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.
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.
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.