Fundamentally, I am officially a "Gold Bug", I just love the idea that comes along with it. Including not trusting central banks, currencies getting devalued, and just the whole idea of gloom and doom is very attractive to me. However, as a professional startegist on options on futures, commodities, currencies, and bonds, I must learn to grow and change and become dynamic. The reason for this is simple: The markets are dynamic.
This has been extremely difficult for a Strategist like myself and the Comex/Globex Gold (COMEX:GCQ14) market. Fundamentally, what is Gold? Is it a safe haven, a flight to quality, a hedge against inflation, a riskier asset, or a physical commodity used for making jewelry and other extravagant items that symbolize wealth? At this point, I'm a little confused about it.
Currently, I can tell you that I believe the biggest market mover for gold is the Russian and Ukraine situation. Other than that, what will move the gold in the coming days and weeks? My bet is that it will probably have to involve hedge funds, big institutions, and China. I have no idea what they will do in the next 60-120 days, but I do believe they will be the market movers in the yellow metal from a fundamental stand point one way or another.
This is precisely why at this moment I am almost 100% reliant on my favorite technical indicators because fundamentals are too uncertain to me for now. So be sure to stay tuned.
Charts and indicators
Technically, I have placed a few indicators on this daily August Gold chart. These technical indicators are the 9 (red line), 20-(green line) and 50 (blue line) -period simple moving averages (SMAs), the Bollinger Bands (yellow lines), and Candlesticks (red and green bars), where on this daily chart each bar represents a day.
The first element that grabs my attention on this daily August Gold chart below is the pennant that I outlined in bright royal blue lines. A pennant, first and foremost to me, indicates a break out is around the corner and coming soon. There are bull pennants and there are bear pennants.
I would consider this a Bear Pennant simply because before this technical pennant formation completed itself the Comex/Globex Gold market was in a downward trend coming off of the high of about $1,380 per ounce on March 18. Now you can't use definitives in the market like; always, never, absolutely, every time, ect. So that is why I say according to my research these type of technical formations typically come out, in the direction of the trend before the formation completed. In this case that is down. So I believe we will come out of this formation or break out of this Bear Pennant down.
The rest of my indicators except one are all pointing sideways and have been for a while. The only indicator that I have on the chart that is not pointing sideways is the 50-day simple moving average (blue line). It is starting to point lower.
Remember no technical indicators work 100% of the time and this is just my opinion based on my favorite technical indicators on this daily gold chart.
Chart by eSignal
Since, I am now bearish on this market there could be several ways to play this market with options and one could be to buy straight August put options or bear put spreads in a 3 to 1 ratio with a call for a hedge or "insurance" in case the trend changes on a dime and the market rallies.
Another potential play could be to sell naked, deep out of the money August options or option spreads with very clear cut exit strategies upon entering the trade for risk management. Remember, when you sell naked options you have unlimited risk and should have a "well-funded" account of risk capital because there are margin requirements as well.
The reason this gold market is right where I want it for this strategy is because markets can only do 1 of 3 things over any given period of time and that is go up, down, or sideways. I believe that the gold market will move lower to sideways as opposed to making a huge rally up over the next 30-45 days.