Gold wasn’t able to withstand the selling pressure today and print a daily cycle low. Instead the metal drifted lower and finished a few ounces below yesterday’s low. In saying this, the mining complex through (NYSE:GDX) and (NYSE:GDXJ) were up from yesterdays prices as so was Silver (NYSE:SLV). Could the miners and silver lead gold out of this daily cycle low or is there more selling pressure ahead? What we do know is that gold bottomed before the mining complex when the sector last printed its intermediate bottom. Gold bottomed in December 2015 (see chart) whereas the miners bottomed in January. Gold usually leads this sector so in all probabilities lower prices have to be expected in the near term as we can’t trust that Silver’s and the mining index’s bottom yesterday will hold.
Therefore I would advise traders to be prudent if going long this sector at the moment. We still don’t have an official daily cycle low despite the excessive pessimism in sentiment on the GDX chart at the moment (see below). A low is near which is why options are a good way to play this set-up. Why? Well with GDXJ trading at $34.56, one could easily sell some $32-$30 put spreads 35-45 days out the money and just sit on these until they come good. Volatility is high in this ETF and although it is not as liquid as its big brother – GDX, commissions on each spread for whatever reason always come in much lower. Initiating the trade with the end in mind is always a good strategy.
Source : Sentimentrader.com
Here is how I see it playing out. If you initiate this trade tomorrow and gold prints its low in the near term, the put spreads would be a clear winner within a week or two. One could actually even increase the probability of success on these spreads by taking profits early – ideally anything from 50% or below. So if you sell the spreads for $100, you just buy them back for $50 which makes sense if the trade only lasted a couple of weeks (instead of holding them until expiration – 35-45 days). For gold to confirm a low, it would have to break through the trend line I have drawn which could easily mean gold getting back to at least the $1250-$1260 level. If I’m wrong and we don’t see this short term bounce, the beauty of options and define risk spreads is that
- Your risk is defined.You only can lose the width of the spread minus the premium received
- You can use duration to your advantage by rolling (if needs be) until the spreads come good.
Gold could easily bottom around its 200 day moving average of $1,160 in about 6 weeks when gold prints its intermediate cycle low. This could mean a $25-$27 price for GDXJ. However anything long (by means of call options or put spreads which have enough time in them) should eventually be recovered by the bull. Have the patience to ride this out..