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.
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
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.