Options play: Can gold prices really go this low?

According to my 10/20/50/BB Trend Finder system, gold futures are in a "PRINCIPAL-TREND" down on three different timeframes.

Fundamentally, according to CBS's Marketwatch on July 24, "Gold futures finished higher on Thursday, putting an end to the 10-session losing streak that sent prices to their lowest level in more than five years." The article further stated, "Gold is being stepped on by world events-rumors of massive Chinese margin calls have Chinese investors liquidating gold, elsewhere flight to safety capital currently prefers the Swiss Franc, U.S. dollars or U.S. Treasuries over gold."

Another important point in the article in my opinion was that, "there is decent velocity to the downside right now." But, there is also strong support in the $1,040 to $1,050 range. If that support is tested, the next stop will be $1,000, according to Kerr. I couldn't agree more with these points on the gold futures market right now.

The other major factor to consider is the fact that the biggest outside market for gold the U.S. Dollar Index futures contract, which typically but not always, has an inverse relationship with gold. The U.S. Dollar Index market recently has responded as a flight to quality or safe-haven trade and is also responding quite bullish on any fair to good U.S. economic data reports. So, in my fundamental view there is a lot more in the bear camp favor and I expect this to continue in the short-, mid- and long-term in gold futures.

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. 

On the daily, weekly, and monthly charts below I have 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-period SMA. Now we have the 10-period SMA as our first area of resistance, then the 20, next the 50, and finally on the charts below the top line of the BB's represents the final area of resistance.


Gold, daily

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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.