Issue #105
| Recommendation:For each $25,000 in equity you are trading …
Buy 10 April 2014 put options on the SPDR Gold Shares (GLD), strike price 127, symbol GLD140419P00127000, at a price of $2.00 or better, good till cancelled. |
Dear Member,
Gold is about topped out. Its rally is running out of steam. And despite all my efforts to try and figure out a way to play the long side of gold, I have yet to come up with any real solid evidence that gold has bottomed and that going long is a low risk trade.
To the contrary, everything I am monitoring tells me we could see gold …
A. Either stage a sharp correction down to the $1,250 level. Or …
B. Fail now, head sharply lower, then take out the $1,180 support level and soon fall to new record lows in gold’s three-year bear market.
Let’s look at just some of the evidence for the bearish case.
On this chart here, I will discuss the four labeled points:
#1. The rally thus far, as noted previously, has been largely overlapping waves, especially at the outset of the rally. This is more indicative of an upward expanding correction, rather than a new bull leg higher.
The latest rally has been more powerful. Yet in corrections, it is often the last leg of the correction that looks most bullish. That’s normal and very deceiving. It serves the purpose of getting the majority of investors bullish, just before the market turns back down.
#2. The trading volume, based on the nearest continuous gold futures contract, has continued to decline throughout the entire rally. That is NOT a bullish sign. To the contrary, it’s bearish.
#3. Open interest, also based on the nearest continuous gold futures contract, has also declined during the rally, with a very precipitous decline unfolding over the last few trading sessions. Another bearish sign.
#4. Previously, I told you that gold was overbought. Extremely so. It is still overbought, indicating a top is near at hand. But notice how relative strength has declined, even while gold continued to rally over the last few sessions. This is a bearish divergence, and is potentially a very negative sign for gold.
Now, to another chart. This one courtesy of Tom McClellan at McClellan Financial Publications.
On the top of the chart is the price action for spot gold back to May 2011.
On the bottom, the number of up closes in the price of gold on a 30-day rolling basis.
Notice the two red boxes I’ve drawn in for you in the middle of the chart, and the third red box on the far right. You can clearly see that when the number of up closes spiked higher, a top was at hand, and a sharp decline ensured.
Back in August/September 2012 — when almost everyone on the planet was bullish gold — I stood firm and told everyone gold was on the edge of a cliff. And indeed, gold plunged more than $600 heading into June 2013.
On the far right of the chart, we are seeing a similar setup. The number of closing highs has spiked to levels last seen back in August/September of 2013 — yet the price of gold has rallied only about $150, or less than 10% from its December 31st low.
There’s much more I could go into, including the fundamentals, which still show disinflation having the upper hand, China slowing further, and the general position of nearly all commodities, which remain in downtrends, despite recent rallies.
But for now, the bottom line is this: At the very minimum, a sharp move back down in gold is near at hand. More likely is a decline that signals a beginning of the next leg down to NEW LOWS.
What about the $1,320 buy signal that was hit last Friday? It was a minor weekly buy signal, not the confirmation needed to indicate a new full blown bull market was at hand. Furthermore, there is very strong overhead resistance at the $1,360 level in gold, which at this time, given all of the above evidence, is unlikely to be seen.
My view: Take on a limited risk position by purchasing put options on the SPDR Gold Shares (GLD).
The recommended put options do not expire until April 19, so that gives you plenty of time for this trade to work out. Furthermore, they are inexpensive. At roughly $200, a 10 contract trade will cost $2,000, plus broker’s commissions and fees.
Each option effectively controls 100 shares of GLD, so a 10 contract position is like selling short, but with limited risk, 1,000 shares of GLD. I have selected a strike price of 127, which is just two strike prices out of the money (GLD is trading at $129.07 as I pen this issue).
Go ahead and act on the above trade recommendation as soon as possible. But please do not chase the market and stick with my buy limit price.
If you are not trading options, for whatever reason, you may purchase an inverse ETF on gold, such as the ProShares UltraShort Gold (GLL).
However, I will not be tracking it for you and you would have to key your exit off what I recommend for the above option trade.
Lastly, yesterday you should have been able to purchase shares in the ProShares UltraShort DJ-AIG Crude Oil ETF (SCO) at roughly the $29 level. Hold and make sure you have entered a protective sell stop at $25.47, good till cancelled.
Also hold your shares in the PowerShares DB US Dollar Index Bullish Fund (UUP), where you are long from roughly $21.73 with a stop at $18.80.
Stay tuned and best wishes,
Larry
