Will gold breakout lead to something bigger?

After the May 28 breakout, more selling came today as traders sold off gold ETF's to 2009 levels and the price reached 15-week lows.

I have placed my favorite several technical indicators on this daily August gold (COMEX:GCN14) chart. They're my favorite because by placing a handful of indicators on a chart, I can learn 10 or 15 important specifics. These technical indicators are the 9- (red line), 20- (green line) and 50- (blue line) period Simple Moving Averages (SMA's), Bollinger Bands (yellow lines), Candlesticks (red and green bars) where on this daily chart each bar represents a day, and a bear pennant (royal blue arrows).

I fully expect more technical follow through selling in the coming days and weeks. We may retest the $1,180 per ounce lows the market made in December 2013. This bear pennant, if one was prudent enough to notice it like I was, will lead to the retesting of those lows in my view. To me, this is just the start of something far more bearish. What if $1,180 per ounce doesn't hold?


Chart by eSignal 


Option play

I am bearish on this market. There could be several ways to play it 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 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. 

This gold market is right where I want it for this strategy 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.

For exact details on other types of risk, months, expiration dates, strike prices, and number of positions feel free to contact me at 312-277-0115 or mmckinney@zaner.com. In addition, I am by no means "married" to the gold market. I like to make trade recommendations to my clients in the direction of the existing trend whether the market be the precious metals, energies, currencies, financials, softs and more.

About the Author
Matt McKinney

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.

Futures and options trading involves substantial risk and is not for everyone.

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