Today's Idea

Though Gold prices continue to hover near 1-month highs, there appears to be some strong upside resistance that may be difficult to overcome in the near-term. With Gold option volatilities remaining on the high side, it appears that current conditions may favor short option strategies for more aggressive traders. An example of one such strategy would be selling bear call spreads in Gold futures options. With December Gold trading at 1738.50 as of this writing, the December Gold 1800 calls could be sold and the December 1860 calls bought for about 10 cents, or $1,000 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late November should the December Gold futures be trading below 1800.00. Less aggressive traders may wish to cover the trade prior to expiration should the December Gold futures close above 1800.00 on a weekly basis.

Fundamentals

Gold's relatively strong performance in the face of the announcement of an agreement between European leaders of a plan to deal with the debt crisis seems to put bulls back in control on the market, although further price gains may face some headwinds. Gold's reaction is even more impressive given the steep sell-off in the other so-called "flight to quality" investments such as the Dollar Index and US Treasuries. Some of Gold's strength may lie in the price rebound seen from commodities -- especially Crude Oil and Base Metals, this past week -- as many traders looked at signs that the Chinese government may move to a more neutral economic policy after several months of monetary tightening to slow inflation. In addition, improving US GDP growth estimates for the 3rd quarter seem to be improving investor sentiment towards commodities in general. However, to keep Gold's bullish momentum, the yellow metal will have to overcome good chart resistance in the 1765.00 to 1775.00 area, in addition to concerns that the recent price rally occurred on much lower than average trading volume, which may be a sign that a good portion of the recent buying was short-covering and not new buyers entering the market. This week's price action may be critical to determining the direction for Gold near-term, as a slew of economic data is scheduled to be released, culminating with the Non-farm Payrolls report for October due out on Friday. Traders may be wise to heed how the Gold market reacts to this data and see how the market performs near key chart levels to help determine the likely probability of Gold's next price move.

Technical Notes

Looking at the daily chart for December Gold, we notice prices surging over $50 per ounce after the market broke out of its consolidation mode and moved above resistance at 1700.00. Unfortunately for Gold bulls, the upside breakout occurred on lower than average trading volume, which may make it more difficult for further upside momentum to occur as we move towards strong chart resistance above 1765.00. The 14-day RSI is struggling to move above 60.00 and has tuned downward, with a current reading of 57.60. Support for December Gold is seen at 1700.00 with resistance found at the aforementioned 1765.00 level.

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