Newmont Mining Corp - All That Glitters Is The Miners

Jun.22.12 | About: Newmont Mining (NEM)

Newmont Mining Corp. (NYSE:NEM) has been beaten down since early November 2011. It is not alone. The declines in the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) indicate that the entire industry has been equally taken to the woodshed.

Although the media reports on widespread global economic slowdown, the quagmire in the eurozone and political unrest throughout the Middle East, not much has really changed. Yet the market goes up on bad news and down on good news. This is quite an enigma. In addition, there are times when price movement seems finely tuned to events being reported. I can only conclude, that there must be great benefits to exchange insiders, in the uncertainty and paradox that this type of price action creates in investors. That said; if something makes no sense whatsoever then the analytical model is flawed.

This is episode after episode, in the continuing saga of "More Debt than Money." Bottom Line - Gold has to go higher. I am not a "gold bug" so for the moment I prefer to own the miners over the metal. However, that could change in the event the civil unrest plaguing the Middle East and Europe spreads to the United States.

So rather than attempting to discern geopolitical events beyond what is in the immediate grasp of the average investor, I focus my attention on the block activity in Newmont Mining Corp specifically. I believe Newmont Mining has just completed the first up leg of a double bottom. I also believe that the demand in the up leg was induced by the Designated Market Maker raising the price. Additionally, he supplied the demand by shorting the issue. This will necessitate and facilitate the second down leg, which will be the second bottom. He needs to cover his short positions and that is why Newmont Mining will revisit the $45.00 range. I believe the two million share block on June 15 was the short.

Once this phase of the merchandising cycle is completed, I expect Newmont Mining will advance to the $53.00 range. That is where the Blocks on March 16 traded. Although I believe this issue could go higher, I will be well satisfied to exit the trade at $51.92. If you have read my previous articles, you would certainly know by now that I consider March 16 a supremely important pivotal point in the market.

Click to enlarge

On the Basis of the foregoing these are my views and observations:

The Trade

I recommend establishing a long position in Newmont Mining Corp. Open your position with only 1/4 of whatever capital you intend to commit to Newmont Mining at $46.26. Purchase the remaining 3/4 of the position at $42.56 and stop out at $40.82. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $51.92. Do not allow this position to exceed 5% of your overall portfolio. You could write some near to expiration covered calls, as Newmont Mining approaches $52.00 to exit the trade with a little premium. If the stock is called away, then the premium will add to your profit and if not then the premium is money in your pocket.

There is always the possibility that the trade may not work out.

There Is Never A Sure Thing (particularly on a short)

Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.

In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.

Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."

If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).

And finally, never be a brave and brainless investor because a fool and his money are soon parted.

A portfolio of $1,000,000 should position size in the following manner.

This is a trade, not an investment. Be ever vigilant.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NEM over the next 72 hours.