How far can this break out higher in gold take us?

Fundamentally, after a brief period of consolidation in the gold (COMEX:GCN14) market, how long can this bullish breakout take us?

From what I am reading here today it is problems everywhere from Europe to the Far East to the Middle East that could be causing the break out in the gold markets. Currently at the time of this writing July 10, 10:36 a.m. I have a high in the October gold of $1,347/ounce with the market up $14.30/ounce at $1339.30/ounce. So at one time we were up over $20/ounce on the day.

The problems in Europe as far as I can tell are coming from one of Portugal's largest banks and some serious debt concerns. According to one of my favorite fundamental new sites Bloomberg, "Portugal's central bank said Banco Espirito Santo SA is protected after its parent missed debt payments, Moody's Investors Service downgraded a company in the group citing a lack of transparency and links to other companies."

All in all, it sounds pretty shady to me. This in my view, just adds fuel to the fire of the sovereign debt issues in many of Europe's nations.

In terms of the Far East the Nikkei in Japan was off due to a weak economic report regarding machinery orders. Also China's markets were lower as well. Then of course we have the ongoing tension in Ukraine and the Gaza strip.
 

 

Daily October gold chart  (Chart by eSignal)
 

From a technical standpoint, right off the bat I see a break out to the upside after a period of sideways action. This to me is bullish. As they say "markets come out of consolidation the way they came in," and that is the case here as gold was moving higher before it settled into this consolidation mode. I have highlighted this consolidation area on the chart below by using two royal blue arrows.


NEXT PAGE: Option Play

Of course now the question is, will it continue higher? Of course the "gold bug" in me says it will and for that matter so does the chart below, as we have clearly broken out of the range to the upside.

On the chart you saw earlier, I have placed my favorite technical indicators. The 9-day simple moving average (SMA, red line), the 20-day SMA (green line), and the 50-day SMA (blue line). I have also added the Bollinger Bands (BB's, yellow lines) and Candlesticks (red and green bars), each bar represents one day of trading on these daily charts.

This move alone today as placed the market in a "SUPER-TREND" higher. To qualify for a "SUPER-TREND" up and a full blown buy signal here is what I need. I need the 9-day SMA (red line) to move up and over the 20-day simple movign average SMA (green line) as both indicators point higher and the market trades above the 9-day SMA. We have that here as you can see on the chart below.

I figured this out by placing my favorite indicators on the charts and studying them, which can be found here, which is a web application that we have developed for our clients called MARKETHEAD where I get about 85% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my readers should check it out. Yes?
 

Option play

I like the idea of buying bull call spreads in gold in a 3 to 1 ratio with a put for a hedge or "insurance" in case the market unravels and falls drastically.

 

About the Author

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.