October Gold is down $3.50 per ounce this morning at $954.60 as I write. The directional movement indicators are still bullish but converging somewhat. The overall price trend is up, and on the enclosed chart, I have drawn some key trend lines. It appears from the lines drawn that gold is in some sort of sideways consolidation bounded by about $980 to about $920, so prices are mid range for now. The weekly chart on gold still shows that the bullish upside down head and shoulders pattern is still developing.
A break out in price over $1008 would be extremely bullish, but so far, the $980 to $1000 resistance levels have been too strong. There are clearly some big sellers up there as prices get close, so until those sellers get out of the way, prices will have trouble getting through $990. I don’t know who the sellers are nor when they will be satisfied. Nobody does. My worry this morning is the strength in the dollar last Thursday and Friday. If, as I believe, the dollar gains strength in the near term, then gold and other commodities may struggle. My gold indicators are still bullish, but the resistance above is holding prices back so far.
Followers of this letter should be long October Gold from $961.70 and short the October ($960 strike) call option from $28.00. In the last few minutes, Gold has taken a $10 tumble. I recommend selling another call option. I recommend selling the October ($980 strike) call option at the market. This will be a naked short call at the $980 level. Given that that is where some of the major resistance is, I feel that is a safe strike price level. If prices come back and trade over $980 at some point in the future, then we will liquidate that short call. Until then we will let it erode with time.
Aug. 10, 2009
David Hall
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