The gold market may be getting ready to make a one-two punch by setting up for a trade on the short side, followed by a trade on the long side. Here's the plan of attack:

Gold recently broke out to the highest level in over seventeen years. The gold bugs are screaming from the rooftops to "buy gold now!" The buying frenzy could allow the market to test important technical resistance clustered on either side of the psychological $500 mark between the 1988 high of $488.50, the major quarterly Fibonacci .382 retracement at $490.30 (as measured between the 1980 all-time high of $875.00 and the 1999 multi-decade low of $252.50), and the 1987 high of $502.30. With so many bulls committed to the cause, if the market fails to penetrate this barrier, a nasty correction could ensue. Since this potential price correction would be a counter-trend move, one would expect it to be swift and short-lived. Therefore, it could lend itself to a put option strategy.

Now where do you take profits on the put options, if the decline happens? There has been a pretty consistent pattern in place during this four-and-a-half-year bull run. After the low was established in the second quarter of 2001, fourteen out of the following seventeen quarters (82%) retraced at least back near the Fibonacci .618 retracement of the previous quarter's range. So this would be the ideal price level to cash out of the put options and enter call options. Having this price level set as a pre-determined profit objective will also allow a trader to decide which strike price to purchase on an option and determine what the risk/reward on the trade is. A Fibonacci .618 retracement of the fourth quarter of 2005 would take gold down to $439.50.

IF the gold market does reach the technical resistance level and the gold market makes a sharp decline to the Fibonacci .618 retracement of the previous quarter's range, then traders may want to use it as an opportunity to enter long positions and get positioned with the longer-term trend that has been in place since the low was established in 2001.

If gold call options are purchased at this technical support level, traders should consider buying call options with a strike price that will allow the options to be profitable with just intrinsic value alone, if gold gets back up to ten dollars below the previous quarter's high. The reasoning behind this is that twelve out of the last eighteen quarters (66%) rallied above the previous quarter's high, but sixteen out of the last eighteen quarters (89%) came within ten dollars or less of the previous quarter's high. If the previous quarter's high is exceeded, start looking for a place to cash out.

If you can pull these two trades off successfully and "knockout" a decent profit in the gold market, you will be ready to take the next trading opportunities. However, when you jump into the ring with the gold market (or any other market for that matter), you run the risk of being wrong and taking a hit. That is why risk management is critical. Only risk a portion of your trading capital on any given trade so as to insure that a losing trade may knock you down, but not out.

Trade Suggestion:
Place an open order to buy a February $470 gold put option @ $14.00 ($1,400) or better. To be profitable, February gold must be at $456 or lower by expiration on January 26, 2006.