More Shine Ahead? AngloGold Ashanti’s (AU) J-Hook Pattern Sparks Buzz

With ongoing trade wars fueling deep-seated fears of a recession, gold has been a cynical beneficiary, driving to unprecedented heights. Up until recently, the underlying mining complex had lagged the performance of the precious metal. Subsequently, astute investors saw an opportunity to latch onto a woefully undervalued sector. For speculators of AngloGold Ashanti (AU), the rewards have been immense.

Headquartered in resource-rich South Africa, AngloGold operates in its home continent, along with the Americas and Australia. Primarily, the company explores for gold, with its flagship Geita project located in Tanzania. Since the start of the year, AU stock has gained an impressive 58.15%. For context, the benchmark exchange-traded fund SPDR Gold Trust (GLD) moved up just under 16% during the same period.

Wall Street analysts have been bullish on AU stock for some time now. At the moment, the equity enjoys a Moderate Buy consensus view. However, where circumstances get a little shaky is with the price target. The mean target is $36, while the high-side estimate is $39. At time of writing, AU exchanges hands for $36.50.

Adding to the perplexity, Barchart’s J-Pattern Screener identified AngloGold as a potential upside opportunity. One of the common patterns used by technical traders, the J-Pattern (or J-Hook) features an initial rally and consolidation cycle. Following this ebb and flow, the bulls recharge, sending the target security higher in a blowoff move.

In some cases, the blowoff leads to a mini-correction before an even bigger rally. While the J-Hook screener doesn’t capture the full breadth of upside, the algorithm waits for confirmation that the pattern isn’t just a random head fake. While there are zero guarantees in the market, the J-Hook signal flashing provides a measure of confidence.

Still, AU stock has already gained almost 13% in the trailing five sessions. It begs the question: is there more left in the tank?

Options Flow Provides Additional Clues for AU Stock

One of the humbling lessons that Wall Street can dish out is that your opinions — no matter how reasoned — have zero impacct. Instead, whatever the market decides is right is all that’s important. And who decides where the market goes? Typically, it’s the institutional players, the so-called smart money.

Hegemonically, they dictate terms. While that might sound undemocratic, you can also level the playing field by understanding options flow.

By default, the options market represents the arena of the sophisticated. Basically, it’s a market within a market, introducing nuances and complexities. Therefore, monitoring unusual options activity can provide retail investors with an edge in potentially deciphering where the alpha dogs are positioning their money. Even better, options flow specifically focuses on big block transactions — transactions that mostly only institutional players engage in.

Put another way, options flow cuts through the clutter and shows the transactions that are truly significant.

On Thursday, net trade sentiment stood at $49,300, favoring the bulls. Not only that, the biggest transaction with optimistic implications was for $15,800 in premiums paid for $40 calls expiring April 17. Given the ask price being 60 cents at the time of the transaction, the breakeven for these calls stands at $40.60. That’s more than 11% higher than Thursday’s close.

Of course, people on Wall Street aren’t in the business to lose money. This setup suggests that the smart money believes that there could be more upside due for AU stock. Statistically, it’s not entirely an irrational position.

Using data over the past six years, AU admittedly carries a neutral bias. Any given long position held for an eight-week period has a 49.84% chance of being profitable. Under the dynamic conditions of extreme greed — defined as a weekly move between 10% and 20% — a subsequent eight-week hold also has a 50/50 shot of swinging higher. However, the difference is that in certain weeks, the probabilities are 55% or better.

Finally, the median eight-week return under baseline conditions — assuming the positive scenario — comes in at roughly 16%. Under the aforementioned dynamic conditions, the median positive return stands at over 25%.

Plotting a Bullish Strategy for AngloGold

For those willing to take the risk, a relatively conservative idea is to consider the 36/38 bull call spread for the options chain expiring April 17. This transaction involves buying the $36 call (at a time-of-writing ask of $210) and simultaneously selling the $38 call (at a bid of $85).

The proceeds from the short call partially offset the debit paid for the long call, leading to a net debit of $125, the most that can be lost in the trade. If AU stock hits the short strike price at expiration, the trader can collect the maximum reward of $75, a payout of 60%.

Based on statistical trends, though, it’s possible for AU stock to reach $40 in a little less than a month. Therefore, the most tempting transaction for the same April 17 expiration date is the 38/40 bull spread. For a net debit of $65, a successful trade could result in a reward of $135 or a payout of nearly 208%.