Presently long-term (SR Channel applied to monthly chart) SR channel support is approximately within the 530 area. Based on general technical analysis, as well what is being dictated by my trading algorithms, neural nets etc., I believe that gold will see a consolidation at these levels. Sell after Memorial Day come back after Labor Day is the old COMEX wisdom and I think that this year will certainly be no different.
However, do keep in mind that the SR Channel generates a moving support/resistance band. All because the current support is at 530 don’t expect prices to retract all the way back to that area. Most likely we will see prices trade more in a sideways range for the summer. Ideally, look for SR channel support to interest with prices in August. Thereby, as long as timing indicators confirm this, setting up the next bull leg in gold prices. Please refer to the weekly chart, located directly below, in this commentary for Fibonacci price projections for the next potential bull leg.
On the weekly chart above a bearish dart blip formation in almost complete. Please see more on this directly below. Please note that trading dart blips from the short side here is as aggressive at it can get. I have presented some trading ideas at the end of this commentary you may want to consider. Intermediate-term support via SR channel is approximately $620/ounce – $625.00/ounce. This price area is one that is also being confirmed via Bollinger Bands as shown in daily chart below.
Additionally, I have marked Fibonacci bull leg projections, which are as follows:
130.9% – $818.30/ounce
161.8% – $912.20/ounce
200% – 1,028.40 /ounce
Dart Blip Formations
On Friday June COMEX Gold reached the first level – 38.2% of a Fibonacci Arc, which is based on the length of the move since early March 2006. The bottom negative deviation Bollinger Band is currently at the 620 area.
Comex Gold Futures & Gold Options Summary:
There are multiple confirmations for a potential consolidation/pullback in gold prices. Even though one could potentially make a play on the short side and possible pick off 3 – 5k per lot the risk is just not worth it. With long-term fundamentals that are so overwhelming bullish the market is much more prone to chopping sideways during these price consolidations.
However, you may want to consider using this period of bearishness and high option implied volatility for building bullish option positions. One simple example could be:
NOTE: Click on image to improve visability.
Buy February 07 700 call for around $5,500.00 per call. 250 days left till expiration
Sell February 07 800 call for around $3,000.00 per call. 250 days left till expiration
Underlining Contract – GCG 07 / Underlining Price – 683.70
This spread in itself will cost about 2,500.00 per spread. However, ratio this spread out by:
Sell July 06 700 call for around 1,650.00. 38 Days till expiration.
Underlining Contract – GCQ 06 / Underlining Price – $664.20
Note: As options near their expiration their:
Theta (time erosion measurement) accelerates
Vega (volatility measurement) decreases. (For example, the Feb. 07 options are more impacted by changes in volatility than the Aug.06 options)
As long as the market remains bearish/sideways/ or even slightly bullish the 700 call will expire worthless in a little over a month from now. Therefore, the actual cost of the Feb. 07 spread will be around $850.00 with a potential maximum profit of $10,000.00 per spread.
Note To Our Clients: Do not add this position to the specific option recommendation we already presented you with. This commentary is of a general nature. The specific option spreads that we recommended are set to take full advantage of the current implied volatility as well as the option volatility call slope.
NOTE: Many of you have been asking about Gold/Silver trading on our forex platform FxNext. We are in the process of adding metals trading to the platform. I don’t have any exact date but were shooting for the end of summer at the latest.
Additionally, I have received e-mails about what a hybrid pip spread is exactly. Here is a brief explaination on what a hybid spread is –
The hybrid pip spread is a new cutting edge foreign exchange technology, exclusive to the FxNext platform, that provides a fixed currency spread during normal market conditions and a dynamic spread in volatile market conditions. The hybrid spread converts automatically to a dynamic feed allowing access to markets during the most volatile periods and reverts back to fixed automatically as the markets stabilize.
By Paul Skarp
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