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Growfast
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Stock, Options, ETF and Commodities Investor; My educational background is in Computer Science and Accounting with significant entrepreneurial and Fortune 100 Corporate experience in Information Management and Technology services in industries including: Consulting, Oil and Gas, Manufacturing,... More
  • Bullish Investment Thesis On NUGT 5 comments
    Jan 26, 2014 12:21 PM | about stocks: NUGT, GDX, GDXJ

    In this article, I plan to discuss my current investment thesis on NUGT (the 3X leveraged ETF on Gold Miners index). For those who have been following Robert Edwards Instablogs and threads on Gold/Miners/NUGT/DUST/GDX/GDXJ, you have been through the learning adventure with us to try to work the turn from bearish to bullish on Gold and the Miners. Roberts' most recent instablog article titled, "Many Caution Signs Flashed Today For Gold Mining Bulls", is located here.

    Investment Strategy

    My primary investment strategy is to look for intermediate trends (6 months to 2 years) to capture returns over the course of those trends. I am not a day trader but do occasionally work to capture opportunity from shorter-term moves associated with investment positions that may work for or against the investment position.

    Current Chart Analysis on NUGT

    (click to enlarge)

    First, let me establish my view on why I think our intermediate term view has shifted from Bearish to Bullish. In the 3 ellipses on the chart above, the first 2 viewing left to right, reflect very rapid turns in the price of NUGT that reflect technical bounces. As you can see, these technical bounces in a relatively short period of time failed, returning to new lows in the price of NUGT. By contrast, the 3rd ellipse formed a base where NUGT worked within a narrow range to build for the entire month of December. Notice too the volume uptrend in NUGT since we broke above that base.

    Since building that base in January, NUGT broke out of the basing range above 30 and has now reached the resistance line at 40. This resistance was expected by Robert Edwards and at present, is where the caution flags are and many are contemplating their investment thesis from here, a number shifting to a balance of NUGT and DUST (the inverse of NUGT). For short-term trades, this may provide opportunity, but I believe one has to be very careful and agile being in DUST in what I perceive as an intermediate term bull trend for NUGT.

    If NUGT breaks out above 40, it should trend toward the next level of resistance at 50. However, if it turns out to fail at breaking out above 40, we have near-term risk with decent support at 35, and strong support at 30, the level of the top of the basing that was done in December. If for some reason NUGT breaks support at 30, then I believe we would be at risk of turning bearish in NUGT and would look to change my investment approach to a new thesis.

    It is my belief on what the chart is telling me, that NUGT will break through this 40 resistance level and head to 50. It could break through 40 quickly, or, it could form a basing pattern between 35 and 40 for a period of time and then break out. (If we are sideways range bound between 35 and 40 for a couple weeks, that may offer our NUGT and DUST combination holders some great short-term trade opportunities).

    Being bullish on NUGT/Gold/GDX/GDXJ for this intermediate term trend, my current positions are:

    - Long on Core NUGT position; Long GDX and GDXJ call options

    - At this resistance level, I am considering a protective put against the core NUGT position, that will protect that position against a strong downward move, should that occur, or, would allow me to trade for some profit if we hold support at 35 in NUGT. If we should break below 35, I would add to the put position to protect against a move to support at 30, or turning bearish going below that level. Below 30, I would exit core positions and sell out of long positions, holding puts to profit from the bearish move.

    In the meantime, my long position is supportive of investment thesis that we will in the near future break through the 40 resistance and head upwards to work on the 50 level in NUGT. However, if the trends and the charts begin to communicate a different message, then I have a course of actions to adjust.

    Fundamental considerations to bullish trend:

    - Many traders are communicating concern about the FOMC meeting this week. When the FED announced the taper in December, Gold and NUGT fell, but within 2 weeks were recovered and on to new highs. Keep in mind, during QE3, Gold fell substantially. Also, QE3 didn't increase money supply, rather it built of banking reserves. So, in my opinion, any decision to take the next step in tapering, should only have at most, a short-term effect on the Gold and NUGT prices.

    - Concerns in many economies around the world of deflationary pressure, which will drive inflationary type policy decisions

    - Demand for Gold continues with some suspecting increasing demand based on the potential for policy change in India and continued increasing demand from China - as well as from international banks as the price has come down

    - Greater fear and instability in Emerging markets, increasing debt in the US and upcoming debt ceiling issues that could put more pressure on the US Dollar against global currencies

    - Treasury yields and Mortgage rates have been hammered downwards the past couple weeks. Treasury rates were at 3% and now hovering around 2.7%, which should help boost the US economy.

    Disclosure: I am long NUGT, GDX, GDXJ.

    Additional disclosure: As discussed in the Instablog article, I may consider put options on NUGT and/or GDX and GDXJ in the near future.The thoughts and opinions in this article, along with all stock talk posts made by the Author, are my own and are shared on the basis of helping others learn, to provoke other points of view that help us all on our journey to become better investors. My posts are never intended to provide investment advice. Investors should always view multiple sources of information in their due diligence process.

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Comments (5)
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  • glaserdx
    , contributor
    Comments (194) | Send Message
     
    Grow-
    Thanks you for posting your strategy which I find well reasoned and supported and offers an alternative to the NUGT-DUST paradigm. Very interesting to see the base building idea with support and resistance levels. You have given us additional targets to look for.

     

    By the way, for not being a day trader, you have made some very astute day trades!
    26 Jan, 02:03 PM Reply Like
  • Growfast
    , contributor
    Comments (273) | Send Message
     
    Author’s reply » Glaser,

     

    In Roberts forums, there are many different perspectives that have been fairly new to me, including those who day trade, scalp and make other in and out trades - some very successfully so. For me personally, that seems to be a lot of energy investment for small returns.

     

    Some things I have learned by participation in these forums is:
    - I personally enjoy the large rewards from patience to allow the longer-term trends to work (ferreting out all the noise) and holding core positions aligned to those.
    - However, there were times in the past even when I saw shorter-term opportunities that I either didn't have the mechanism to take advantage of them (only core positions I didn't want to disrupt), or just didn't pull the trigger.
    - This has led me to enter my positions these days with core positions and trading shares (can be on long or short side), or the use of options (calls and puts; short or long).

     

    This has helped to provide maximum flexibility to enhance profits and better manage risk associated with my investment thesis for positions - and, gives me greater ability to adjust if data begins to tell me my original thesis was wrong without having to be stuck with large losses.

     

    Hope these thoughts help.
    26 Jan, 03:56 PM Reply Like
  • bobzic
    , contributor
    Comments (61) | Send Message
     
    Very interesting article.
    26 Jan, 04:05 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (413) | Send Message
     
    Great article, Grow. Thanks for posting. I too very much believe in the bullish intermediate trend for gold and the miners that you espouse. If due to continued weakness in emerging market currencies and stocks, continues to weigh on our stock market, and/or the Fed decision on Wednesday is perceived as a bit too hawkish, we could see a flight to quality into the U.S. dollar this coming week, that could cause a very temporary boost in U.S. dollar value and be somewhat depressive to gold and also the miners. However, like before when we slipped a bit, we were back higher within a couple weeks, and I agree with you that we should snap right back up if we hit a rough patch in the short-term. I will definitely be adding to NUGT at $35 and again towards $32 and $30, if we should get that low.
    26 Jan, 04:43 PM Reply Like
  • glaserdx
    , contributor
    Comments (194) | Send Message
     
    Grow -
    I am very interested in your strategy of finding longer-term trends and having the patience to let them play out (and make adjustments when needed). I believe that style of trading is more aligned with my temperament (although I am fascinated with R.E.'s quick moves, knowledge, and trading skills).
    So it would be great if you wrote some other articles about other long-term trades, how you identified them and the strategy you have.
    26 Jan, 06:07 PM Reply Like
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