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Options Pro Report - Al Abaroa - A Market Weekly - Metals

Metals: Last week I penned, “Now that gold is testing the long-term trend line support, IV is attempting to perk up again. Are option traders looking for protection against a break down in price or are they indicating that another move higher may be on the horizon? I wish I knew with certainty. Even though the 20 and 50 DMA have recently had a bearish crossover, which could lead to a breach of support, I am still leaning towards the latter.” This past week gold broke below the uptrend line from the October ’08 lows, along with the 100 DMA. I must admit I was very surprised to see this occur. While I may not agree that it should have happened, the fact remains the same, a technical barrier had been breached. In my opinion, this type of price action must be respected. What confuses me is that despite the technical failure, option volatility spiked less than 1% on Tuesday’s drop. However, it did spike from 18.7% to almost 22% on Friday’s strong up move. Does that mean that the options’ market is not convinced of the break down? I’m not sure and as such I think it is prudent to adhere to the old adage, “when in doubt, get out”. Friday’s final print shows gold closing back above the trend line. Those that remain long will want to see strong volume next week, coupled with sustained price action above the trend line. Otherwise, indecision may lead to further price weakness. Stay tuned.

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