This article was rejected for publication since it was focused on trading JNUG, rather than a 'long term investment', but these leveraged ETFs should never be used as a 'long term investment', so meeting their publication requirements was impossible. Thus, I've posted it here. Hope you enjoy it.Trade This Leveraged Mining ETF For Fun And Profit.
Jul. 17, 2014 11:02 AM ET | About: Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (NYSEARCA:JNUG), Includes: NUGT
- This fund is very volatile with large daily moves so it's most effective to be trading : buying low and selling high, but only when gold is trending up.
- With an uptrend in gold, this fund gives you enormous leverage to the upside, but watch it closely and use stops.
- Keep it simple, be patient and this can provide excellent daily entertainment and returns.
This article was written and ready for early July, at which time, gold was still in an uptrend and there were good opportunities to be had with gold related stocks and ETFs.
Fast forward to Thursday, July 10 and the price of gold went vertical from $1330 to over $1342. Needless to say, the price of related stocks and ETFs also went vertical.
Prior to this move, I was actually getting a little nervous with so much news now telling people to "buy gold" and "the bottom is in, it's time buy". That's when I usually start to take some profits and lower my exposure.
I was indeed doing that, but had also added the Direxion Daily Jr Gld Mnrs Bull 3X Shrs (NYJNUG) to my strategy and it proved to be a winner, and it was fun!
Notice that I've edited this article now before re-submission to be mostly past tense. Everything changed on Tuesday, July 15. This is now a lesson in hindsight which you can apply to the next opportunity when it comes along. That is, when gold starts a new uptrend (which could happen any time, but I am now being very cautious and don't expect it to turn back up any time soon).
Let's face it, all work and no play makes Jack a dull boy. Worrying that "the sky is falling" is also no fun and with trading, very unprofitable. I've noticed a lot of emails recently from Dennis Slothower. I learned to ignore his predictions several years ago. I mean, how many times can you predict a huge crash that doesn't happen?
Interesting also is that Larry Edelson is again calling a top in the DOW and expecting a large pullback. He sang that song in February this year, exactly as it was hitting bottom and it went straight back up the next day and never stopped. At least he quietly admits to be wrong on that one. He's also strongly touting gold now, about 2 months late.
In mid May, I recommended buying Direxion Daily Gold Miners Bull 3X Shrs (NYNUGT) ( See the article here: seekingalpha.com/article/2229803-its-tim... ). At that time, buying JNUG would have been foolish. Many comments said buying NUGT was also foolish, but it has proven to be very profitable.
A fellow SA writer is suggesting that you now sell NUGT (seekingalpha.com/article/2302835-its-tim... ), and selling some of your position near $50 (on Wednesday, July 9) would certainly have been prudent. I felt it still had room to run though, so left most on the table and planned to simply sell it all on a stop when/if gold really did reverse its current trend and start a hard downtrend like it did in March.
The beauty of trading JNUG, is that you can squeeze the maximum benefit out of an uptrend in gold, silver and mining stocks. As with NUGT however, there is a natural 'decay', so this isn't something you want to hold long term. But what's "long term"? I prefer to build up a small position by selling part of my position to lock in a gain, then re-buying a bit more than I sold.
Let's first take a look at the recent daily activity for NUGT to emphasize the benefit of trading part of that position now.
Note the 'monster' days, and particularly how they often open higher or lower and then make a big move in the opposite direction over the day. Selling on a stop on June 24 was pretty simple and obvious, but unfortunately I didn't. Buying back at $42 took some courage, but with gold prices holding up, it made sense to try buying low and be ready to sell on a stop. I had indeed sold some the previous week so re-bought at the end of the day at 41.67.
I had 'learned my lesson' and then got stopped out on the late morning dip on June 26, which is why I hate using stops (and probably why I didn't use one on the 24th, since I'd already sold some at $44 on June 19). More often than not it simply 'bumps you off the bus' before it roars higher. No big deal, since I still had most of my position. I should add that if gold had continued to break lower, then I would have sold everything and taken my gains. Sure, I missed the top, but do NOT ride this thing back down if the overall trend changes direction to the downside.
At this point I wasn't able to trade since I needed the price to go lower to buy, or higher to sell. On June 30, prices again opened lower, and remembering June 26 and other days, I was prepped and ready to buy.
Fortunately, I had recently discovered JNUG and it was down significantly more than NUGT, which was still above the price where I was stopped out. So I decided to give it a go.
It simply seemed to be a reasonable bet. As you can see in the chart below, gold was holding up okay and was at a possible bottom. JNUG was down -5% early and gold often gets pushed down pre-opening and then pushes up all day.
I mean really, look how gold keeps spiking up. With the price pushed down early to $1312 on June 30, I was ready and willing to buy. And those 'spikes' are actually tiny on a percentage basis. From 1319 to 1313 and up to 1328 is a drop of just -0.5% and a gain of 0.7%. In comparison, JNUG was down -5% early in the day and ended the day up +12.5%. That's over 17% during the day, and it's done double digit moves again since, including +16.4% yesterday (at time of second edit), July 9.
Here's a look at JNUG, NUGT and GDX.
You can clearly see here the crazy up and down movement with JNUG, so go ahead and take advantage of it.
I actually missed out on the big day on July 9 (with JNUG but enjoyed it with NUGT and miner positions), because I got 'thrown off the bus' when gold did a mid-morning plummet. You can see it clearly in the gold chart above and it then resumed its climb.
I left the room for a banana and less than a minute later, saw the plunge in gold and JNUG had fallen from wavering around 28.20 to 27.60, so I quickly sold everything and waited for the storm to pass. Unfortunately, it stopped at 27.02 and then came back to where I'd sold. Since I couldn't continue watching all day, I couldn't risk buying it back, and it made no sense anyway, since I was locking in a nice gain and it could easily fall back down to $26 at least.
Instead of falling further, it roared up to $29, which was easy to predict because gold recovered from its drop and continued inching higher.
This shows that it is useful to keep a small position for the longer term, rather than selling everything, hoping to buy back lower. Thus, the trading can be used to lock in gains and build a position. For example, you could buy 30 shares on your first purchase and then sell 20 to lock in a gain. Now you still have 10 shares for a longer run. Not a lot, but for small investors doubling your money on a $300 bet is still rewarding and pleasant.
If it does pullback a few dollars, which it has done consistently, then you can again buy 30, or maybe 50 and then sell 30. Of course, if you can manage 50 or 100 shares (or more) you get a nicer return on your time invested, but each investor needs to manage their own risk and not over extend themselves.
Then, you can sit on a position for a longer run up and continue to trade a portion of your position. When you think gold has finished moving up and will likely hold flat or go back down, then it's time to sell everything, since this is not a position you should hold long term because of the ongoing decay. If gold stays flat, JNUG will steadily drop.
Now, I know JNUG and NGUT are triple leveraged on mining ETFs, but watching the live gold price is an excellent way to help decide when to buy (and when to sell). The price levels of JNUG are quite unpredictable but gold was repeatedly moving up from dips to around 1312, thus, when gold was at those levels and starting to move up, that's when you wanted to pull the trigger and buy JNUG. Then, when gold and JNUG were high, sell and wait for a repeat cycle.
In the chart below, you can see that you had "easy pickin's" on 5 of the past 7 trading days.
If you bought on June 30, you either sold at the end of that day, or early July 1 for a sweet gain and watch it slide on the 1st. Perhaps you played the game again on July 2, and hopefully sold after it stalled at $28 and started moving down. July 3rd was an enormous day with very little movement in gold. If you sold on July 3, then you may not have re-bought on the 7th. I missed selling at $28.60 in the dieing seconds so still had my shares. Then, on the 8th, I sold on the mid-morning drop with hopes of re-buying close to $26 or lower. If you were watching the charts that day, you could have easily jumped back in based on the strength in gold and the price of JNUG started to follow.
So, now what? (now=July 9) That's a good 'review of the game tapes' and it will help us plan for the next match, but what's the game plan now with the price over $32?
Let's now zoom out for a broader view.
Chances are good that we can continue playing this game, but I'll be careful buying now, at these prices. I'd rather wait for the next dip and ignore this current run up, even if it continues to $40. But, if gold shows a sharp move and JNUG starts barrelling higher, then I'll try grabbing it on the run since I've already got gains in my pocket.
I can just imagine all the technical traders shaking their heads and perhaps rolling on the floor laughing at my strategy, but it's pretty similar to watching a kid jumping on a trampoline. Play the bounces, and if/when it breaks through the 'bottom' and goes lower, like it did in March, sell everything and the game's over.
And remember, if you were playing this game in March, you were buying at $32 and selling at $40, four times!! And on the 4th re-buy (at $32) it continued sharply lower, so you sold at $31 or $30. You made $8x4=$32 and then lost one or two bucks. That's a heck of a lot of fun!!
Let's now take a closer look at the past 5 trading days, which includes today's BIG move. (July 10) If you were already in the game, it was a classic example of selling high on the gap up opening and then waiting for the bottom.
The blue arrow is where I sold my full position to lock in my gain and avoid a potential drop back to $25. It looks like a tiny dip now, compared to the move today, but it could have easily continued down to $22 on Tuesday, or it could have turned back up to $36 on Thursday. You simply don't know and there's no way of guessing so you need to get a bit mechanical with this game and simply follow the bounces. Stick to your strategy and don't start guessing.
Zooming out to a 1 month view shows the trading range more clearly.
It's very possible that a new trading range will establish itself between $30 and $35. So, again, the strategy: buy low which is now, perhaps $30, but be patient and wait before buying. Watch the live price of gold for confirmation of a push back up.
It you're right with your first buy, sell some when it gets over $35 again (and don't be too greedy and stubbornly aim for $36, the opening high today). Keep a little for a longer run higher but hope for a pullback to buy back what you sold plus some extra. You can do it buying 30 and selling 20, but perhaps a better minimum is buying 50 and selling 30. And with my trading account there's no charge for buying ETFs so that's an extra little bonus.
Once you've built up a small longer term position that you're comfortable holding, then sell the full lot that you re-buy. And if gold gets up to the $1380 range, then I'd consider reducing your 'longer term' position and keep the same trading volume. Again, don't get greedy. Have fun with this but remember, it's also a bit like playing with fire and you don't want to get burnt.
This is the live gold chart which I like to follow, setting it to a 5 minute view. ( www.goldprice.org/live-gold-price.html ) It's moving up nicely now after hours, so if you bought JNUG or NUGT near the bottom today (Thursday, July 9), you'll likely have a smile on your face tomorrow at the opening.
And note that the 'big' moves in gold (the drop on the 8th and big jump on the 10th) are really just small deviations from a fairly steady climb. JNUG is simply a massive exaggeration of these deviations and you can profit nicely from them.
So, play with caution, but don't miss out on the fun.
And now, since this article didn't get published last week, we can learn some more valuable lessons. The overall strategy continued to do well with another profitable day on Friday, July 11, and perhaps you sold some later in the day, or perhaps you let it all ride, since it wasn't 'excessively high'. It was only back to the mid-range of the previous day.
Seeing the big drop in gold price pre-opening on Monday, I was basically ready to buy, assuming that it was another 'bogus' push down in the gold price and we'd get a nice rally back up all day. That indeed is what happened for the first hour and a half of trading, but then the bottom really did fall out, and gold dropped from $1339 to $1320. I had bought some JNUG early in the day and now sold it for a small loss.
At this point, gold was back to a point of support, so there was still plenty of room for optimism. It was short lived however, as gold dropped again from $1320 to under $1312.
This was now serious, and real. Remember, the previous support for gold was around $1312, so this was a pretty good break of that, but since it was such a sharp and drastic fall, it was reasonable to assume that it 'over shot the mark' and could / would recover. Thus, no need for panic just yet.
The next day, July 15, with gold pushing up, I was a cautious buyer, buying back some of the NUGT positions which I'd sold. I felt it was too risky to try again with JNUG and it opened higher than what I'd sold at anyway, so buying it would have broken a cardinal rule of trading: Don't re-buy at a higher price than what you sold.
Then, again, when I went away for just a couple of minutes.. BOOM!! The bottom dropped out of gold and it sank to under $1300. That's it! Game over!! I quickly sold my NUGT at market (catching exactly the bottom, of course, at 35.18, from which it bounced higher).
I didn't use a stop because the previous day I had a stop in with JNUG and it simply jumped over my stop without executing, which left me scrambling to cancel it and put in a new sell order. I really hate it when that happens!!
I kept 100 shares of NUGT, just in case it was a 'bluff', and because I really, really hate selling out completely and then have it turn around, and I thus ended up selling exactly at the bottom. I'd rather ride a small position lower, giving me margin to then re-buy the large position that I sold.
So, the 'game' with JNUG is currently over in my opinion. Buying now, even at the previous low range of $24-25 is risky, I think. Gold is no longer in an uptrend. In fact, it is now back to the mid-range that it held for much of April and most of May. And looking back at the drop from March highs, and the extra dip in early June, makes me very, very cautious now. But, it's been a great learning opportunity and I've locked in some nice gains, so I'll be more than happy to see the prices continue down now and be ready to play this game again when conditions again turn favourable.
I still have 30 shares of JNUG which I didn't sell, again, because I hate selling out completely all at once and having it turn out to be the bottom. I sell the majority and keep a bit. I may just hold it since there's no way of knowing which way the market will go, but will sell on any next hard, sharp drop in gold.
I hope this article will be as useful to others, as the past few weeks have been to me. And when the opportunity presents itself again, we can all take maximum advantage of it. Best of luck!! And remember what they say, "You have to be lucky to be good, and good to be lucky."
Disclosure: The author is long NUGT, JNUG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am only 'technically long' because I still have small positions in JNUG and NUGT, however, as detailed in the article, I am now rather bearish and will sell my positions if the prices drop sharply again.
Disclosure: The author is long JNUG, NUGT.
Additional disclosure: I have remained long with small positions but also remain unsure as to which direction gold is going to go next. Thus, extra caution is advised for the time being.