Gold was setting up for a bounce even before hostilities broke out in the Middle East on October 7.
Gold had been in a steady downtrend since early May. But its sell-off accelerated in September.
The severity of that fall put the SPDR Gold Shares ETF (GLD) into oversold territory. GLD bottomed out on October 5. Then it began to rally as buying momentum returned.
By getting into GLD before that bounce, we generated a very quick 49% for members of my options advisory, The Opportunistic Trader. And when GLD rolled over, we banked our profits.
Then GLD looked primed for another rally in early November.
We captured that move once again. And our trade generated an even bigger 59.5% profit.
Let’s check out this latest GLD trade to see how we did it…
Ahead of the Pack
On the chart below, you can see that GLD’s downtrend accelerated in mid-September.
The steepness of that fall pushed our momentum indicator, the relative strength index (RSI), into oversold territory (lower gray dashed line).
And that set GLD up for a bounce.
SPDR Gold Shares ETF (GLD)
Then GLD’s uptrend started to peter out around the middle of October.
Its October top coincided with the RSI stalling in overbought territory (upper gray dashed line).
The RSI fell back toward support (green line). And that declining momentum pulled GLD lower.
GLD’s retracement made sense because other assets and commodities (like oil) had retraced from their war-fear highs…
So now it was gold’s turn for a blow-off.
Yet we suspected that wouldn’t last long. Rates were falling hard at the time. That would help support gold prices and bring an end to GLD’s retracement.
With the RSI holding support (green line), we entered a long position on November 9 by buying a call option. (A call option should increase when the value of the underlying asset rises.)
GLD bottomed just two days later.
Then it started rallying as momentum steadily climbed (the orange line).
Take another look:
SPDR Gold Shares ETF (GLD)
Just like our GLD trade back in October, we were once again ahead of the pack.
As gold’s rally continued, it started to get more coverage in the news. And people everywhere seemed to call for new all-time highs.
But when you’re ahead of the pack and everyone suddenly turns bullish, that’s often a good time to bank your profits.
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The RSI was approaching overbought territory as well. This confirmed our need to get out.
So on November 27, we closed out our position by selling our call option for a 59.5% gain. Altogether, the trade lasted 18 days.
To be clear, we generated this strong return by using options.
Yet again, this trade shows how we can bank very tidy profits by looking for strong setups and being nimble.
Editor, Trading With Larry Benedict
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