Options play: Gold futures make a new low for the move

July 20, 2015 12:03 PM

Gold prices are in a "Principal Trend" down according to my 10/20/50/BB Trend Finder indicators.

Fundamentally, the Comex/Globex gold futures market continues to move lower on the idea that Fed Chair Janet Yellen and the rest of the FOMC will raise rates this year. The big question is exactly when, and by how much? In addition, upbeat U.S. economic data also has pressured gold prices.

However, what is more important is what is not pushing gold higher. For example, a Eurozone nation like Greece and its severe sovereign debt issues have not pushed gold higher. The fact that there is a specific problem with a nation leaving the euro currency-- a fiat currency--has not been a reason that gold prices were pushed higher. Also, just the mere thought of a new currency, the Drachma for the nation of Greece--which if it came to fruition would be worth a little more than zero and there could be hyper-inflation and total social chaos for that country--has not pushed gold prices higher. Finally, the fact that banks in the country of Greece have been closed for about a week has not pushed gold higher. If this is not international economic uncertainty, worry and fear then I don't know what is. In the past it's these exact fundamentals that have sent gold prices up, but not nowadays.

Technically, I have added my favorite technical indicators to the gold chart below. They are the 10- (red line), 20- (green line), and the 50- (blue line) period simple moving averages (SMA). I have also added Bollinger Bands (BB) (light blue shaded area) and Candlesticks (the red and green bars). On the daily chart below each bar or Candlestick represents one day of trading. I have coined this combination of my favorite technical indicators the 10/20/50/BB Trend Finder system. These few technical indicators tell me several different characteristics about the market at a quick glance. I have them saved on my charts in Markethead so they can populate on any chart, any market and any time frame at the click of a mouse.

On the daily chart below I have August Gold in what I refer to as a "Principal-Trend" down. This is the strongest form of a trend that my 10/20/50/BB Trend Finder system can identify. In order to achieve this what we need to have happen first is a cross of the 10-period SMA (red line) down and under the 20-period SMA (green line) as both indicators point lower on fairly sharp angles while the market itself trades below the 10. Now we have the 10-period SMA as our first area of resistance, then the 20, and next the 50, and finally on the daily chart below the top line of the BB's.

August daily gold chart

Some good plays I think could be to buy puts or bear put spreads with a call for a hedge or "insurance" in case the trend changes up dramatically. I would recommend this in a 3 to 1 ratio as always. Buying puts or bear put spreads have a limited risk. Another play could be to sell deep out of the money calls with GTC stop orders to buy futures at a higher price in case the market rallies.

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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.

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/.