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Gold Market Update - Upside breakout likely - Options straddle opportunity

Commodities / Forecasts & Technical Analysis Jan 23, 2007 - 10:35 AM GMT

By: Clive_Maund

Commodities Subtle but important changes in recent days have substantially increased the chances of upside breakouts by gold and silver. The situation is now very finely balanced with an army of traders either sat on the fence, or, depending on which way it breaks, on the wrong side of the trade. When it does break out - and it is beginning to look like it will be to the upside, there will be a stampede and an upside breakout from here could thus easily involve a $20 - $30 up day for gold.


On the 6-year gold chart we can see how it has managed to remain above its key 300-day moving average in recent days, close to which, as can be readily seen, it has found support throughout its bull market. With the recent small Head-and-Shoulders top, which we traded successfully, having aborted, we are now able to draw in the upper blue trendline shown. The situation is now extremely technically tight, with gold also being pressured from above by the falling red trendline. Clearly, this is a situation that can be expected to force a breakout to start a new trend very soon now.

Gold breakout chart

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The recent dramatic breakdowns by Copper and Oil have provided an unwelcome bearish backdrop for the Precious Metals so far this year, and resulted in us adopting a cautious stance thus far, but because gold and silver have managed to hold their ground in the face of this, coupled with the fact that both Copper and Oil are now deeply oversold and look set to turn up shortly, their bearish influence is now quickly abating, thus taking the brakes off the Precious Metals. In fact, given that an attack on Iran is actually a growing possibility, the huge drop in the oil price borders on insanity - it would appear that this market is looking no further than the warm winter and the rout of the Republican oil men in the November election. We will be reviewing oil again shortly on www.clivemaund.com

While the action of many large gold and silver stocks remains ambiguous and difficult to decipher, upside breakouts in a range of junior and exploration stocks have been observed in recent days, which provides additional, if perhaps somewhat unreliable, evidence that an upside breakout by gold is in the works.

Because we have arrived at a major crossroads which is expected to generate a big move, after a large trading range that has dragged on for about 9 months, more sophisticated traders will readily appreciate that this is an excellent point at which to buy both calls and puts simultaneously, which is known as a straddle. You buy both calls and puts, and once the market declares itself by breaking out, you then have the choice of dumping the losing side of the trade for whatever you can get, which normally increases the prospective profit from the position, but leaves you vulnerable to being whipsawed, or leave it open in the knowledge that the winning side of the trade cancels out the losing side by a large margin, assuring substantial gains. We will be looking at some straddle possibilities on www.clivemaund.com shortly.

By Clive Maund
CliveMaund.com
The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.


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