February 70 Puts: Symbol XAU NN
1 /16/98   Prev..4.125      Open...3.500    High...3.500      Low...2.750     Close...2.750     Change...-1.375    Vol...43

February 65 Puts:  Symbol XAU NM
1/16/98    Prev..2.000      Open...1.250     High...1.500     Low...1.250     Close...1.375     Change...-0.625    Vol...307

February 70 Calls:  Symbol XAU BN
1/16/98    Prev..4.000      Open...4.875    High...5.375      Low...4.875     Close...4.875     Change...+0.875   Vol...138
 
  

 Previous, January 16th XAU Commentary

     Good morning trader's and welcome back. In my previous commentary, the Prudent Trader had recommended another put trade, this time at the 69.50 price point during Thursday's trading session. At the time it was felt that the XAU would not be successful in closing above the 20 day MA and Feb. gold was not expected to close above $287.90 .
     As we see from the 5 minute charts, the XAU gapped higher on Friday and Feb. gold spiked temporarily above the 296 mark. It is assumed that Feb gold's rise above its 20 day MA triggered a short covering rally that lifted the XAU index before quickly running out ofgas. For the remainder of options expiration Friday the XAU moved sideways. At day's end, gold appeared ready to fall back to the 286-287 price zone.
     At week's end the XAUNN February 70 puts closed at 2.750 which was well off from the original entry price of 4.125. So far this is a bit of a dissapointment after two very successful trades but the Prudent Trader is optimistic that the current loss will be minimized or even eliminated all together. With gold still in the grip of the bear, these "flash in a pan" rallies are minor annoyances. Even if they work against your trading decisions, they are more than likely to unwind themselves. The bottom line my friends.......DON'T PANIC and don't hurl stones at the Prudent Trader for spoiling your Martin Luther King holiday!!   However, since the position has traded away from the original purchase price by more than $1, the prudent strategy is to minimize the loss and perish the thought of attempting to profit from this blown trade.
    It appears that the XAU will fall victim to the expected pull back by the gold futures to $286. The XAU  will break the acending trend line on the 5 minute chart and most likely fill the gap created last Friday by settling back to the $69.50- $70.00 price point. This is currently the price zone where  the Prudent Trader recommends closing out the position. If Feb gold were to fall decisvely below $286 so that the blue line became resistance rather than support, the Prudent Trader might be compelled to hold out for a small gain just to cover the commisions.
 
 

     It's too early to say if a significant change in the trend is developing. If this were the case, the 20 day MA or at least the 13 day EMA should prove to be support for the XAU during this expected pullback. What does the Prudent Trader think? Nahhhhh!!
    The daily chart of the gold futures shows gold spiking to the green trend line of resistance and nothing more. Although the red descending trend line was broken and retested as support, the psychology for owning gold had drastically different than it was one year ago.

    The XAU index managed to rise into resistance at the 50 day MA with also coinicided with the descending white trend line. It is unlikely that this index has what it takes to even attempt a rise to the 75 price point where the yellow and blue lmog term descending trtend lines are scheduled to unite.
    The Prudent Trader would like to give a little technical tutorial. Look at the DMI indicator below. See the green line? that is the ADX line which stands for average directional movement. wHen the green line is rising, a trader should view the price action as being "with the trend". When the green line is declining, the price action should be interpreted as being counter trend. If you notice the recent rises by the ADX have been accompanied by market declines and the declines in the ADX  have been during market advances. The ADX is currently falling so it comes as no surprise that the Prudent Trader is not ovoverly concerned that the DMI+ line (red) has crossed above the DMI- line (cyan).

    Looking at the weekly XAU chart, the 13 week EMA is still declining and although the MACD on the chart looks potentially promising a signal isn't a signal until it signals. Get it?  It could be several more weeks before the weekly MACD crosses above its slower MA. In the meantime, the area between the lower weekly Deaner Band and the 13 week EMA has been a zone of resistance throughout this bear market . Therefore it is still possible that the XAU may rise to the 13 week EMA (currently 76.43 and falling) but even then the trend will remain down.

    The CRB Index, which has correlated well with the XAU and gold, is reachnig resistance.On Friday, the CRB tradee within 0.02 points of the 20 day MA (228.95) This too should see the beginning of more pressure for the XAU and gold.

     Additionally the US dollar should begin rising again after some brief consolidation. Just a reminder, a falling US dollar helps gold rise but a rising US dollar tends to see gold decline in value. The US dollar has slipped of late but still remains above its 20 day MA.
    Finally, Barrick Gold (ABX) looks promising on the surface, but the Prudent Trader sees too much overhead resistance to be a bullish at current levels. In order to pooh pooh everything that is good about this stock, the Prudent trader is considering that the daily bar for Friday 1/16 was a bit narrow for a stock trading over 3 million shares. One would have though that the range would have been wider.

     In conclusion,  the Prudent Trader remains convinced that going short last Thursday was sound advice. Because the trend was down, it was prudent to go short at the first perceived pivital price point. The XAU went beyond expectation but currently is at another price point worth pursing on the short side if you are currently not in play with puts. If you are currently short and holding a position at a loss, a sound trading discipline will prevent you from going short at higher levels because the old saying "never add to a losing poistion" is a lesson that should be learned early in any option trader's career.
    It is hoped that viewers get the picture that the Prudent Trader is currently not bullish even though the XAU rose more than 8 points last week. My downside objective for the XAU remains 64.50 at the present time. Never the less it is 90% likely the Prudent Trader will reaffirm his decision to exit the XAUNNs at 69.50  to keep his personal discipline in practice.
     Best of luck in your trading decisions.
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