Gold has seen a very impressive rally since breaking out above 700. While in the longer term we expect this trend to continue, in the very near term we have a number of factors that lead us to believe a pullback is about to begin. We see a very strong seasonal tendency for gold to pull back through the month of October. Many technical indicators including Slow stochastics have recently issued sell signals and show this market as being temporarily over bought.
We also have an interesting tendency for gold to peak at the very time that the commercial short interest also peaks. So put all this together and you have a good opportunity for a short term trade. We are getting a 4:1 risk to reward ratio and we have a $48 range in which we can profit.
click on the chart to enlarge
Buy November 2007 Gold 730 and 670 puts while selling two November 2007 Gold 700 puts for a combined max cost and risk of 60 points ($600) or less to open a position.
Or goal is to catch a move between 676 – 724 on the Dec. futures contract. Break even points are 676 and 724 assuming a 60 point fill. Max. profit would be realized at expiration if the market is at 700.
Max risk, before commissions and fees, and assuming the above mentioned fill would be approximately $600. The full premium paid for the spread is lost at expiration if the market expires above 730 or below 670.
by Derek Frey
Odom & Frey
Call us at 1-866-636-6378