Is Call Accumulation in Gold Signaling a Bottom?

09/08/2008 12:00 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Several trader comments about the relative weakness in gold stocks spurred me to revisit the call accumulations I’ve discussed in the past. In previous weeks we saw that stocks such as Goldcorp Inc. (GG), Gold Fields Ltd. (GFI), Newmont Mining Corp. (NEM), and Randgold Resources Ltd. (GOLD) had seen optimism in the face of price deterioration. We also saw that the Amex Gold Bugs Index (HUI) had broken primary support but was oversold. I looked into the data and see that while the technical breakdown has progressed there has been a continued bias toward calls in some of the stocks above, as well as Freeport-McMoRan Copper & Gold Inc (FCX). But first, let's start with the charts.


chart chart
chart chart


What stands out here is that we are at a critical crossroads. The HUI is now testing the second layer of long-term support while the individual stocks are showing breaks of their recent lows.

I looked at the International Securities Exchange (ISE) buy-to-open data for the last five days and see a bias for calls in stocks such as Freeport McMoran Copper Gold (FCX), Gold Fields (GFI), Goldcorp Inc. (GG). Both FCX and GFI show net call accumulations of more than 7,000 calls. In other words there were 7,000 more calls purchased than puts purchased. Meanwhile, GG shows net call accumulations of more than 14,000 calls. This leaves me pondering what I said in the link above -

" seems we have the following situation…gold stocks break support and are then hit with aggressive selling pressure which pushes them into oversold territory. Traders then jump on the group and start trying to call a bottom."

"As I said Monday, my experience has been that bottoms usually don't occur when they are widely expected. The HUI is more oversold than it has been in quite some time but I think that the zone near 400 looms as heavy resistance. Given the optimism, I am wary that a bounce would be anything more than an oversold rebound that retests the former support as resistance."

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