Straight Up ‘Gold Going Red’ Trade (GLD)

Today’s trade requires little commentary.  The set-up is straightforward, and the trade is a short term bet based on technicals pure and simple.

So let’s get right to it –

This is the SPDR Gold Shares ETF (NYSE:GLD) for the last six months.  And as you can see we have a bearish engulfing pattern as of yesterday’s close (in red).

We also have a very clear overbought RSI signal (in green), while MACD appears to be rolling over.

The spike in volume yesterday (in black) also speaks to an immediate top in GLD.

And these three items form the basis of our near-term bearish take on gold.

Not quite.

It always behooves us to scale back to the longer term chart to ensure that our read is the correct one.

And here’s what we find there –

There was no overbought RSI signal on the latest rise, but the last top did produce one (in red), and this is a common pattern on both daily and weekly charts as tops are developing.  The first signal results in a pullback, the stock then moves to new highs – but without triggering a fresh RSI overbought signal – and then the descent begins in earnest.

We’re not certain that will be the case here, but there are a number of factors militating towards that end.

Such as –

• A set of moving averages that never managed to unfurl. We’ve developed this in other letters, so suffice now to say that a major intermediate turn is always more reliable if it comes on the heels of a full unfurling of the moving averages.  Again, no sign of it here.

It should look like this –

• We also see waning momentum from the bulls over the last four months, evident in the steep divergence between price and our key RSI and MACD indicators (in green, GLD weekly, above).
• Finally, the full count of the reverse head and shoulders pattern (in blue) has also been realized.

We therefore see the future of gold… as red.

And we’re playing it by selling a CALL spread and buying a PUT spread.

Like this –

A Jew and His Gold recommends you consider selling the GLD March 20^th 148 CALL for $2.95 and buying the GLD March 20^th 152 CALL for $1.85.  Use your $1.10 credit to then purchase the GLD March 20^th 144 PUT for $1.57 and sell the GLD March 20^th 140 PUT for $0.53.  Total credit on the trade is $0.06.

Many happy returns,

Matt McAbby

Follow @HughLOHaynew