The recent action in gold off the charts suggests that gold is trading within a tight range.
Recent tops are up at the 1316 level with near term bottoms in the mid 1270’s. Activity reveals that the trading range with increased volume is much tighter than that. The market is therefore in my view in a wedge formation.
Bulls And Bears
The longer these wedge formations exist the better the chance of a pronounced move to the upside or downside in the future. There are just as many bullish reasons to be long gold currently as there are to be on the bearish side of the argument. Bullish arguments include the Ukrainian/Russian situation, the recent bullish Commitment of Traders report, and reports out of India that say the government there may curb import duties on gold that could enhance physical buying.
Bearish arguments include the recent upsurge in the U.S. Dollar, all-time highs in the stock indices which may weaken safe haven demand in gold, and decreasing physical demand from China. The aforementioned reasons together have pointed to rallies being sold into above 1310, and dips being bought at or below 1280 basis June futures. To turn the recent trend and for a break-out from the wedge, the market therefore may be awaiting the next set of news which could be technical, fundamental or a combination of the two.
Gold Strangle
To take advantage of the potential breakout or breakdown in gold prices, I propose the following trade. For a shorter term trade I would advise the following strangle. Look at buying the June 1325 call and buying the June 1260 put for five points or a $500.00 cost. The risk on this trade is the price paid for options plus all commissions and fees. The key here is that options expiration is on the 27 of May, leaving a little less than two weeks for June Gold futures to move to at or near one of these strike prices.
For a longer term trade, I am looking at buying the July Gold 1340-1370 call spread and simultaneously buying the July Gold 1250-1220 put spread for 7.5 points or in cash value $750.00. The risk on the trade is the price paid for the spread plus all commissions and fees. IF the strikes on either the call spread or the put spread finish in the money at the time of option expiration, one would collect $3,000.00 minus all commissions and fees.
Webinar
For those interested in grains, Walsh Tracing’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup.
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.
