Gold futures ended a three-day losing streak on Tuesday while regaining footing over the $1650.0 level.
The market seemed scant of any potential bullish triggers that may have sparked the rally. Other than a report released yesterday from the Shanghai Gold Exchange which reported a sharp increase in physical gold trading, investors appear to potentially be awaiting the onset of earnings season and the reaction of the stock indices, that began Tuesday after the close.
KEEP AN EYE ON EARNINGS
Deteriorating earnings could be seen as keeping the Fed’s quantitative easing policies in place through 2013, which would counter what was said from the Fed’s minutes release last week.
Gold prices have fallen over 2.5 percent over the last three sessions, largely, in my opinion, due to comments made by Fed governors last week that the Fed could wind up its QE program before the end of 2013. It is my view that after a drop from last week’s high from 1695 to 1626 basis February, that we possibly saw some bargain hunting today along with short covering.
KEY LEVELS
The gold market hasn’t traded down to these lower levels since last August, filling a gap on the charts with last week’s drop. Now, in my opinion, we are seeing the bounce from the gap fill on the charts. In my view, if we can hold the 1626-1630 level over the next few weeks, prices may rise back over 1700.
TRADE IDEA
With physical gold trading seemingly on the rise along with the caveat that the Gold market may hold support in the 1625-1630 area into early next week, I am proposing the following trade. For a conservative position trade I am looking to buy the March Gold 1700 call and sell the March gold 1725 call for a purchase price of 5 points or $500.00.
The risk for the trade is the price paid for the spread plus all commissions and fees. In this instance, the risk would be $500.00 plus commission and fees on the trade. The maximum you could collect on the trade would be $2,500.00, if both strikes settled in the money at the time of expiration, minus all commissions and fees. In lieu of buying a dip in the futures market, this position may offer the investor a good risk to reward ratio of almost 5 to 1 and doesn’t eat up margin.
More aggressive traders can add multiple spreads. With the central bank bond buying throughout the world, I personally do not believe anything has changed long term despite recent pullbacks in the market.
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.
[Editor’s note: Lusk offers a free daily Gold Update newsletter. E-mail him here for details.]
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