Gold has traded in a range since the end of March, but Todd Gordon sees a rise in market volatility coming that could send the yellow metal higher.
The TradingAnalysis.com trader commented Thursday on CNBC's "Trading Nation" that recent comments by the Federal Reserve could spell more uncertainty in the market. Potential rate hikes aside, Fed minutes released on Wednesday from the March meeting stated its intent to start shrinking its $4.5 trillion balance sheet later this year.
"We're seeing some volatility in the markets," said Gordon. "I actually want to look at the gold market, which could be moving up here" off the uncertainty that could result from the Fed.
To determine just how high gold could climb, Gordon looked at a long-term chart of GLD, the ETF that tracks gold, dating back multiple years. According to Gordon, a "triple-test trendline" can be drawn on GLD starting from its peak back in 2012, with the line finishing just above current levels in GLD at the $123 to $125 mark. This leads Gordon to believe that should GLD bounce, it can hit the trendline again at around those levels.
"There are a couple sources of volatility and concern in the markets," explained Gordon. "I think that's going to be enough to punch the market through resistance to test that long-term downtrend from 2012."
But since gold has been trading in a range, Gordon wants to establish a safe level on his GLD trade in case it doesn't break out to hit the multiyear trendline. Gordon sees "resistance" at the $119 level dating back to 2015, and decides that this level is "support" for another move up in GLD.
Gordon is looking to sell the GLD May 5 weekly 119-strike put and buy the May monthly 117-strike put for a credit of 75 cents, or $75 per options spread. If GLD closes below $117 on May 6 expiration, Gordon would see a maximum loss of $125 on the trade; meanwhile, if it closes above $119, he will keep the entire $75.
While the trade has a skewed reward-to-risk ratio, Gordon's levels account for the possibility of GLD continuing to move sideways instead of breaking out.
"We just need the market to go sideways, up or even slightly down and you can still make money on the trade," he said.
Despite trading in a range, gold is still up almost 9 percent year to date.
