Gold has put in a prety significant run in the short term back up to previous highs, but still below it’s 150 day moving average – a popular view on the health of gold.  Here’s some data I shared with my clients on the what we’re seeing for gold:

Gold Trading

You can look at option activity as somewhat of a sentiment indicator showing fear and euphoria.  When traders pile into one side of any market, the market tends to move to the other end of the range.

We are getting close to a level where I would consider taking profits or even positioning short for a move back down towards lows.  Obviously this is a short term speculative trade, so adjust position size accordingly.  And wait for the price action to reverse, as everything still looks very bullish here.  But once it does reverse I do expect the action downward to be sharp.

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As a gold trader, I’m always looking for an edge.  I’m not talking about looking at a stock chart, because stock carts are so over rated as a tool to trade with.  Why?  Because everyone can see a chart.  There’s no inside information there.  And the market has a highly random component.  No one knows what will happen tomorrow.  And unknown to you = random.  Plus, the gold chart isn’t suited well for technical analysis since the metal is so influenced by currency changes – the price action is not primarily driven by technical price and volume levels…

What I’m talking about is inefficencies created by traders.  In my studies of options activity on gold, we have two components.  The actual put call ratio and the put call ratio on the open interest.  The ratio of these two data points tells you when there’s an inefficiency – when the pcr is deviating from the oi pcr – and this generates an opportunity.

We have one of those opportunities RIGHT NOW.

Before I show you the data, I must remind you that not every one of these inefficient events will result in a winning trade.  And the efficiency of the signal is unknown until it plays out.  Meaning the signal may produce a 1% monve (yawn) or a 10% move, which can make you a healthy sum, whether you want to play it by trading GLD, a 2x leveraged ETF on gold, or Gold options…

So here it is:

How To Trade Gold

As a trader, you want to trade extremes.  And extreme highs and lows are opportunities to take advantage of future price movement.  This extreme is als following a peak in call buying generated in the beginning of July.  That peak is working it’s way off, but has not reached an extreme in Put Buying – where at that point, I would get more bullish on gold.

This is only one of a few of our timing indicators on gold.

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