Couch Potato articles mentioned "... Gold has crashed below its recent trading range to six-month lows... billionaire investors George Soros and Louis Moore Bacon dumped holdings of gold exchange-traded products...The news reported a U.S. Securities and Exchange Commission filing showed that Soros Fund Management LLC cut its holding in SPDR Gold Trust by 55% in the three months to Dec. 31, while Baconâ€™s Moore Capital Management LP sold its entire stake in that fund by the end of last year... Gold sank on Thursday driven by a surge in the U.S. dollar as the euro weakened on negative economic news from Europe...prices dropped the most in more than eight years... "
The dollar is displaying strength compared to other currencies and this is pressuring commodity prices. However, technically, gold is severely overbought and the GLD charts below indicate prices should hold at current support. As we can see in the GLD ETF weekly chart below, the current $152 price acted as resistance up until the end of June 2011. Then, following the technical analysis "change of polarity" rule, in August when the price broke through resistance the $152 level converted to support. Basically, after converting to support in August 2011 the $152 price level has held firm and is obviously being challenged this month. Also note that over that time period the Relative Strength Indicator (RSI) has never been oversold as it is now and the price has always recovered when it reached oversold levels.
To support the analysis above, we can see in monthly chart below the last time the GLD was at it current oversold level was in fall 2008. Gold crashed hard in September 2008 and the chart confirms the next month began the precious metals' Bull Run that topped out at the end of August 2011. Even on its monthly chart you can easily how GLD basically has traded range bound since September 2011 and is still holding at the longer term support level.
Our GLD ETF March regular expiration put spread exit rule was triggered and we are doing a trade adjustment. The worst situation for a put credit spread is a price crash after entering the trade. Downward price drops are usually higher volatility moves that transpire harder and faster compared to when the price surges upward. Trade adjustments can be a little more complicated when the price drops below a short put contract because you need discipline and patience to wait on the price to settle. If a put credit spread does "go bad" the best case scenario is to hopefully have time left to limit the loss prior to expiration. Fortunately, there is a lot of time left before March regular options expire and since this a quarterly expiration month we have the option of using a few additional weeks.
At this point the hourly chart below concurs with the monthly, weekly and daily charts in that the price may have bottomed out and is bouncing off long term support. Notice in the hourly chart how until today, GLD closed near the low of each day for the past week as gold succumbed to constant selling. In today's price action, you can see that as the priced dropped to the long term support level, right on queue traders stepped in to push gold higher. We talked about billionaire investors George Soros and Louis Moore Bacon dumping gold and contributing to a selling stampede. But since they actually sold out last year, a lot of analyst believe investors may have overreacted and if the technical signals are accurate the current price should hold. Of course the market does what it wants to do regardless of what fundamental or technical signs say. But it is best to "trade what you see" and we believe it is a reasonable bet to adjust our GLD put spread based on the current support level
GLD Position Update ---------------------------------------------------------------
GLD closed at $152.62 on Thursday
The February 12th Couch Potato published a March expiration GLD put spread
We are closing out the March regular expiration contracts and rolling the position out to a March Quarterly expiration GLD put spread (see tables below)
After the trade adjustment the total position should be approx. $1,400 in the red.
As mentioned above, we are closing out the March expiration put spread and rolling the position out to the end of March
Also, note the higher margin requirement as we increase the number of contracts and reduce the distance between the short and long strikes
If prices gap up tomorrow OR if prices drop sharply we will hold off on the trade adjustment to let the price settle down. There is plenty of time prior to March expiration to confirm gold has stabilized.
Immediately after initiating the GLD put spread gold prices crashed and breached below our March $156 strike short put. As the price continued downward the put spread exit rule was triggered this week and we wanted gold to stabilize before adjusting the trade. We need to close out the position to avoid the chance of assignment on the $156 short put contracts. As discussed, there are signs gold may hold at the current support level and we are rolling the current March put spread to an end-of-month March Quarterly position.
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All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.