Chris Tyler, Optionetics.com
January 14, 2011

Can the harmonized duo of silver (SLV) and gold ever go their separate ways as other highly-correlated instruments have on occasion? If a major divergence were to happen, the potential breakup of sorts wouldn’t require the involvement of investment bankers. Instead, the price action would solely be the work of traders seeing one as still more precious down the (fill in the blank) paved road and the other as having lost its luster.

If we’re to look for confirmation of this type situation, our sometimes pal PS Elliott does suggest it’s possible—and it may surprise you which one looks to be the better store of value going forward. For its part, silver is showing a potential Wave 3 daily and weekly completion within a bullish cycle still in need of a fifth and final leg higher. Similarly, a recent optimistic but limited risk plug for Silver Wheaton (SLW), from a Hot Shots piece a couple weeks back; is displaying an identical bullish EW pattern as still at work.

On the other hand, our representative gold proxy the SPDR Gold Trust (GLD) has PS Elliott displaying W5’s nearing or at completion on both the daily and weekly time frames. On the daily chart shown below, an EBOT signal triggered during 2011’s second day of trading in a nasty-looking bearish gap which looks to confirm a triple topping pattern.

Figure 1: COMEX Gold (GLD) Daily Bearish
Also evident and supportive of a top when looking at GLD’s daily chart is the heavily-favored activity by traders dumping shares following the last four gaps to the upside during the development of the triple top. Another clue during this period is the “5, 35 Oscillator” which has shown clear divergent behavior. Finally, confirmation for the larger topping pattern is now being assisted by a bearish flag toiling with 50SMA resistance and a bearish crossover of GLD’s shorter-term 10SMA and 30SMAs.

Figure 2: COMEX Gold (GLD) Weekly Topping

Confirmation of GLD’s daily top on the weekly time frame, also as mentioned prior, comes by way of a Wave 5. However but unsurprisingly, this Wave 5 has yet to trigger an EBOT signal. Using the Fibonacci retracement tool and prior key resistance near the physical market’s key $1000 level, we see one area of critical support which could magnetize bugs in the coming weeks and months is the 95 – 105 area.

Figure 3: GLD Bear Risk Reversal 10x Jan 150 / 123

So what’s a bear to do? While I don’t make “recs or wrecks” to others portfolios, GLD’s options are of the ultra-liquid variety and maintain one point wide strike prices. That means there’s a plethora of tailor-made positions which one could consider ranging from outrights, verticals, calendars, regular and modified flies, condors, risk reversals or maybe the likes of a strangle.

Regarding the latter two strategies, near equal and huge volume of about 45,000 contracts apiece in the March 150 call and March 123 put coupled with a slight uptick in implieds suggest, without doing all the necessary but sometimes elusive digging, that some traders may have been going buggy with a long strangle or a bearish risk reversal and which might be deserved of further homework by readers.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site