Gold Breakout on the Horizon?
Thursday, December 8, 2011
Gold traders are looking to the equity markets and the ECB to help determine the near-term market direction. Volatility in terms of trading ranges as well as implied by option pricing has been falling lately, indicating that neither the bull nor bear camps have had the upper hand in trading. Additionally, neither side of the market seems to have any conviction as to the future movement of the market. Technically, the chart shows a classic wedge formation, indicating that a breakout may be on the horizon. Given the relatively low volatility priced into option prices and the lack of market direction, some traders may perhaps wish to consider purchasing a long straddle or strangle with the expectation that a breakout may be nearing. Some traders may wish to buy the January 1725 put/1775 call strangle for a debit of 50.00, or $5,000. Given the high cost of the trade, some traders may look to exit the put portion of the trade on an upward breakout or the call portion of the trade on a downside move.
Fundamentals
Gold futures have been trading in a much tighter range than usual during recent sessions, as many traders try to find the near-term direction of the market. The relatively tight trading ranges have been a welcome reprieve from the wild volatility seen over the past several months. The Gold volatility indexes GVX and GVZ have moved into the mid-20's, down over 15 points from recent highs. Traders have wrestled between a number of market forces that have pulled the market in different directions. An uncertain economic outlook and the firm Dollar have weighed on metals prices. However, the uncertainty facing Europe has kept Gold an attractive investment vehicle for defensive traders. Also, Europe is expected to keep money loose as it grapples with their financial crisis. The wildcard that may ultimately trigger a response either way may be equity prices.
Technical Notes
Turning to the chart, we see the February Gold contract's trading range continuing to tighten, forming a large wedge. The direction of the market is unknown, but the ridge of the wedge or triangle suggests that the potential move could be explosive. Currently, the RSI and momentum oscillators are giving neutral readings, which can be expected during tightening ranges. Also, the moving averages have been relatively flat due to the lack of market direction.
Rob Kurzatkowski, Senior Commodity Analyst
