The huge sell off in precious metals and oil last week was astonishing for
options trading investors. The underlying price action in the S&P 500 has been
relatively strong compared to gold, silver, and oil. Many are suggesting that
the commodity bubble has burst. Margin requirement changes in silver futures
have been fingered as the primary catalyst for the nasty sell off. Silver had
gotten way ahead of itself in terms of price and parabolic moves higher are
usually followed by parabolic moves lower. Silver buyers learned a painful
lesson as their investment has declined more than 30% in five days. It doesn't
take a genius to realize that we are going to bounce higher at some point. With
a sell off of this magnitude it would not be shocking to see at least a 50%
retracement of the entire move in coming weeks. It is also possible that this is
a buying opportunity for precious metals and oil. A bounce this week is likely
as silver went from being severely overbought to severely oversold on the daily
chart in one week. The chart below illustrates the 50% retracement and the RSI
reading for silver futures: In the month of April OptionsTradingSignals members
were able to capitalize on rising silver prices to close a trade that produced
an 18% return in less than five days using a double calendar options spread.
Members regularly receive trade alerts focusing on gold and silver using the
SPDR Gold Trust (NYSE: GLD ) and the iShares Silver Trust (NYSE: SLV ) which
have extremely liquid options. While silver prices have been crushed, gold
prices have held up a bit better. In fact, in this sell off gold has been less
volatile in terms of intraday percentage price movement and has not suffered
from near the losses that we have witnessed in silver. The gold futures chart
below illustrates key price levels: Members of the OTS service received a trade
alert on April 6 for an options calendar spread that was converted to a vertical
spread. When the vertical spread was closed on April 26 the members realized a
gain close to 56% based on the maximum risk of the trade. Recently we have
received some poor economic data which has put a drag on equities the past few
weeks. The S&P 500 Index Options (CBOE: SPX ) spiked to around 1,370 on the news
of Osama bin Laden's death and then sold off from that point. The chart below
illustrates the S&P 500 futures rally and subsequent sell off highlighting
current key price levels: Members of OptionsTradingSignals received a trade
alert on April 12 to put on a call option vertical spread to capitalize on
rising prices. On April 21 partial profits were taken and eventually stop orders
closed out the position on May 4 locking in a total gain of around 32% for the
trade based on maximum risk. Overall, price action in the commodity space has
been extremely volatile the past week with silver and oil really getting
hammered lower. Gold and the S&P 500 held up a bit better and it would not be
shocking to see the S&P 500 put on a rally from here if oil prices stabilize.
However, if the U.S. Dollar continues its recent rally it will force the
commodity space as well as equities lower. The daily chart of the U.S. Dollar
Index futures is shown below: In closing, I am expecting a bounce in coming days
and a .382 or .500 retracement of the entire move in gold, silver, and oil would
make sense so I would not be too aggressive shorting. However, I would not
necessarily be an aggressive buyer either. It is going to take time for market
participants to digest the recent moves. In weeks ahead it will be more apparent
what price action is likely to do and I would be shocked if we did not see a few
low-risk, high-probability trades setting up. Get My Free Trade Setups:
http://www.optionstradingsignals.com/profitable-options-solutions.php
