Gold Trading Analysis 2 Sep 2009

Gold Trading Analysis 2 Sep 2009

The gold market continues to tighten into an ever small trading range as the pennant pattern is reinforced still further as each trading day passes, with yesterday’s gold trading session being no exception, with the  long legged doji of yesterday confirming this technical pattern in classical fashion. The longer this price action continues then the greater will be the momentum of the breakout on the daily spot gold chart when it does eventually arrive, and any move will no doubt be dramatic. The key, of course, is when this may occur which is always the most difficult question to answer, and for gold trading at present this is a classical trading set up for the straddle, either long or short. The long straddle is designed to take advantage of this increased volatility by purchasing a put option and a call option at the same strike price and expiry, and is often called a directionless trade – put simply, as long as we see increased volatility then the trade will profit as long as this occurs before the option expiry date. The question then is how far out should we buy, but as a general rule you should allow sufficient time for the option trade to develop, but should this not occur, then to have some option value remaining which can be sold back to the market. The second trading strategy is to use the short straddle which benefits if the market continues to trade in a narrow range, as at present. By collecting the option premium as a short seller you hope that the market remains quiet with no volatility, in which case the options provide a profit. Again the expiry time is critical, and as an option seller you want time on your site which is a wasting asset for the buyer as time erodes the premium and any remaining option value with increasing speed as the option expiry date approaches. So in summary, two classical approaches to trading in the gold market at present. Friday of course is Non Farm Payroll again, but whether this will provide the catalyst is anyone’s guess – probably not, but we will almost certainly see increased volatility on the day as the gold market too reacts to the numbers.

Support: $930.35   Resistance: $955.67

Support: $918.23   Resistance: $929.89

Support: $905.43  Resistance: $917.90