Gold’s shining rally is coming to a close, says TradingAnalysis.com founder Todd Gordon, who is betting against the yellow metal thanks to what he sees in the charts.
Tuesday on CNBC’s “Trading Nation,” Gordon explained that there were two reasons why he wanted to be short gold. First, Gordon points to the metal’s inverse relationship to the U.S. dollar. Comparing a chart of the gold-tracking ETF GLD to the dollar-tracking ETF UUP, Gordon points out that there have already been four separate points of the year where UUP moved lower, and GLD rallied.
And now that the dollar is rallying to a three-week high, Gordon believes the inverse relationship will continue and send GLD lower.
But aside from its inverse relationship with the dollar, the technical chart of GLD itself isn’t looking too promising. Gordon points out that GLD has recently fallen back to a “support” level at $122, its previous high from April and June of this year, and could even fall through that level as the dollar rallies.
“Resistance was broken, you flipped to then act as support, and support so far has held at this decision level,” he said. “But we’d expect the market to move higher from this support level, and that’s not happening.”
In order to establish how far GLD could fall, Gordon looked back to December 2016 and drew an “uptrend support line” connecting the two lows GLD has made over the last year. As a result, Gordon believes GLD could fall back down, and even beyond, that $120 level where the line finishes.
As a result, Gordon wants to buy the November monthly 122-strike put and sell the November monthly 118-strike put, paying about 95 cents per share, or $95 per options spread. If GLD were to close below $118 on Nov. 17 expiration, then Gordon could make a maximum profit of $305 on the trade.
However, if GLD begins moving higher, Gordon wants to be able to find a point to stop out and exit the trade before he loses the entire $95 he paid to put it on.
“If the 95 cents in premium we just laid out in the debit spread gets cut in half, call it about 47 cents, it’s time to cut the trade,” he said.
GLD fell 1 percent on Tuesday thanks to a jump in the dollar index, which climbed to 93.