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Too much talk, so taking some profits

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This is just an observation from the past, but today's constant comment on gold prices in the media may well be sign that the near-term run for gold stocks is coming to an end. In June of 2000, the "kiss of death" was CNBC having a mutual fund manager on their program talking about how well his gold fund had been performing. While I haven't seen a fund manager show up on CNBC for a couple of years, I'd be using some of today's hype to take some profits.

Gold/Silver Index Chart - Daily Interval

I've gotten a lot of e-mail from subscribers that played some gold stock from early January that are sitting on some nice gains in call options and underlying stocks. "When do I sell?" is the question now most commonly asked. The best solution I have is when the gain becomes too much to give up, or the stock pulls back through your trailing stop. In our last update on the XAU.X, we thought there might be a short-term "blow off" into the $66.67-$70 range and it looks like some of that may have taken place yesterday. Today's media barrage that Gold futures broke above the $300 level hasn't been enough to keep Gold futures above the $300 level. Gold futures close at 03:00 EST and right now the March contract is trading $297.80. As it relates to the XAU.X, I'd at least have a trailing stop on some partial position on a break below yesterday's low of XAU.X $65.05. That's where momentum players will most likely be looking to exit. A close below the $300 level may have momentum players thinking the move in gold isn't sustainable.

Just as some gold stocks have rocketed higher in the past week as everyone want in, they can fall sharply if momentum players start heading for the exits. Expect some volatility and have a plan together to benefit.

Jeff Bailey
Senior Market Technician
Option Investor

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