Some people are total gold bugs. They’re obsessed with its every move.
I don’t share that same passion. But I’m always happy to trade in and out of gold for quick profits.
I’ve learned over many decades that gold has a habit of disappointing overzealous investors. No sooner are they sucked into a move than it reverses the other way.
We saw that just over a month ago.
Gold had rallied strongly since the start of the year. The rally blew off on April 22 after briefly breaching the $3,500 level. Massive volume underpinned the surge through that level – typically a bullish sign.
But bullish sentiment soon evaporated, sending it lower.
When gold tried to rally again at the start of this month, it topped out at a lower high, with sellers rushing for the exits. But this provided another opportunity.
So let’s see how we turned that opportunity into profit…
Pullbacks in a Major Trend
The chart below shows how SPDR Gold Shares ETF (GLD) rallied from the start of the year. We can see the steady climb in the 50-day Moving Average (MA, blue line).
Within that uptrend, though, you can see several pullbacks where GLD reversed after making a new high.
The underlying rally resumed when the Relative Strength Index (RSI) held and rallied off support (green line).
Check out the chart…
SPDR Gold Shares ETF (GLD)
Source: e-Signal
GLD saw a major move higher in April, where it rallied 16.5% in two weeks. That came as the RSI rebounded from just below support. It also came as GLD rallied from just above its 50-day MA (another bullish signal).
But that major move blew off, and GLD reversed off its all-time high as the RSI inverted from overbought territory (upper gray dashed line). That’s a reversal pattern that has repeated throughout the GLD chart.
After holding the RSI support level, GLD rallied as buying momentum returned. But that move faded and reversed from a lower high.
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And here’s where our opportunity started to unfold…
That down move looked overstretched. So we wanted to capture a rebound by buying a call option with the RSI again tracking around support. We were looking for rising momentum to push our trade into profit. (A call option increases in value when the underlying stock rises.)
As the chart shows, though, things didn’t initially go our way. GLD drifted. Take another look:
SPDR Gold Shares ETF (GLD)
Source: e-Signal
But gold then found a base and started to rally off the 50-day MA. With that up move starting to lose conviction, we decided to take our profits off the table last Wednesday. Altogether, that turned into a 32.1% profit in just seven trading days.
To be clear, we generated this profit using options. Options use leverage, so they magnify both profits and losses.
And because options have an expiration date, you risk your option expiring worthless if your anticipated move doesn’t pan out soon enough.
But rather than rushing into a gold trade for fear of missing out (FOMO), we were patient and waited for a pullback…
And when that pullback became overstretched, we set ourselves up to capture a bounce by using options. That’s why options are one of my favorite ways to trade gold’s moves.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. While options are a key part of my trading, they’re not the only tool I use. Leveraged ETFs have been grabbing attention recently for good reason.
They can provide boosted returns on some popular stocks… as well as major indexes, commodities, and more. Just look at Tesla. It’s seen some huge moves up and down. If Tesla swings 5% one day, a leveraged ETF could help you make 10% or even 15% in a day.
They can even help us profit when the stock stumbles and falls.
And one of the best aspects is that buying leveraged ETFs is just like buying any other stock. So if you’d like to learn more about how they work, then be sure to check out all the details here.
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