Another Perspective on Shorting Gold

Who has not seen indications of a top in Gold. All of your non-market friends are talking about Gold. I even noted, no lie, that the Alligator tour boat captain from my Florida trip was talking about buying Gold. But that tour was a week ago and Gold ($GLD) has done nothing but move higher by over 7% since then. Is the end really in sight? The weekly chart below has several indications of a

top. The Weekly Relative Strength Index (RSI) is elevated at 85 a level it has not seen since May 2006, and the volume is tailing off as it moves higher now above the channel it has traded in for the past 3 years. But that does not mean it will stop rising. In fact as I wrote this at 6:00pm it is gapping higher over 1900 per ounce on the futures contract. So do you just wait for it to start falling to take advantage of a down move with a short sale or put buy? That is one answer. But look the weekly ratio chart for $GLD against crude oil, using the United States Oil Fund ($USO) below. It has been

out of the Bollinger bands for the past 3 weeks and remains so to start this week. The RSI on this pair is also elevated near 85 and looks to be turning flat. Perhaps a precursor to moving lower. With $USO holding support, as seen on the chart below, this may be a way to play $GLD from the short side in a pairs trade. Using 5.75 in the ratio as a stop, buy 56 shares or $USO for every 10 shares of $GLD short looking for a pullback in the ratio to at last 4.50 and possibly the 3.83 to 4.10 area. This risks $23-35 to make $465 at the 4.50 ratio or a reward to risk ratio of over 13:1.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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