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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
  • A Path To Profitability For NUGT Holders  27 comments
    Oct 12, 2013 5:53 PM | about stocks: GLD, GDX, NUGT, DUST

    In the last 2-3 days I have relentlessly researched the internet for information on gold and gold stocks. I have tried to locate some information that would be helpful to traders holding triple leveraged gold miner ETF (NUGT) shares during this never ending selloff. I searched high and low for clues to how low the current selloff might go, and what is the best way to play it.

    Research Articles

    I did find some very helpful articles and will share a couple of the articles now. An article just posted today tells us "Gold Stocks Have Never Been As Cheap As Right Now" by Adam Hamilton with Zeal Research (click here). The article has a great chart that shows unhedged gold mining index (HUI) divided by the price of gold, and concludes we are near a generational bottom and when the current bear market ends, gold mining stocks will bottom and turn higher in a big way. Gold miners should double, triple or quadruple in price.

    But a must read article was posted July 26, 2013 by Jordan Roy-Byrne titled, The Chart That Signaled The Bottom In Gold Stocks (click here). A chart showing nine Gold Stock Bear markets is most revealing. Check it out below:

    (click to enlarge)

    The current bear market in gold stocks began in September 2011, and is shown as the black line, marked "E" above. Eight past gold stock market bear markets were added as A thru D, and 1 thru 4. This allows one to compare how the current bear market compares to past bear markets. This is very helpful in helping us know when and where to expect a bottom. By scaling all starting prices at 100, one can see that bear markets inevitably end when the index is 31 to 40 % of where it started, and it can last 7 months to 3 1/2 years. Because this article came out this summer, soon after the miners hit their late June low, it does not include the 2 months of rally followed by the 2 months of selloff that has occurred since. The current bear market is right in the middle of the pack, having lasted 25 months, and fallen to the 35% level of where it started. If we take out the low we hit in late June, we should stop when we are no lower than 31% of our beginning price. Translating this to the GDX low in late June at 22.21, GDX could fall another 9%, to a price of 20.20. If we return to the 22.21 GDX low, NUGT would be trading at about 34.40. If GDX stops falling at 21.50, NUGT would fall to 30. If it fell to 20.20, then NUGT would trade at 28.20.

    Choice # 1: Gutting It Out

    I believe this chart is very helpful at helping to determine the worst case scenario. I have been saying for awhile that if we bottom at 30 in DUST, a quick rebound rally of 33% in GDX, would result in a 100% rally or double in NUGT, back to 60. But that assumes only a 33% rally in GDX. Previous bear markets resulted in rallies of 616%, 606%, 560%, 324%, 205%, 163%, 141%, and 52%. The worst kickback took 2.5 months to snap back over 50%. At 30 in NUGT, it would pop 150% to 75. I am comfortable with my prediction of no worse than a low of 30 in NUGT, so I will not be panicking out of NUGT. By the same token, I will not be a happy camper if the 30 price is actually hit. This selloff has, and continues to be nothing but gut-wrenching.

    Choice # 2: Stopping Myself Out Of NUGT, And Buying Back At Bottom

    Just for argument sake, suppose GDX keeps falling all the way down to 16, the price it hit at the 2008 low. From Friday's GDX close of 23.05, you are talking about a 30% further drop. That would be a 90% selloff in NUGT, down from 38.65 to just 3.86. A nearly complete wipeout of my funds. However, I was brainstorming earlier when someone asked me a question about "What if NUGT does not stop at 30, and falls down to 15?" Well, a quick double from 15 means it would quickly pop back to 30, and might rally to 45 to 50 eventually. Not good at all. But, if I had stopped myself out at 30 and waited for the 15 low to hit. And I bought back in at 15, I would buy twice as many shares as I had when I was at 30, and so when it doubled back at 30, I would have my money back. If we reach 30, I need a double to get back to 60. Wherever I stop, at 40, 35, 30, whatever, if I buy back at the bottom, the double kickback rally will get me back even. Because I believe that 30 or 28.20 is the lowest NUGT can fall without a significant rally, I am not going to risk putting in any stop as my luck, positive news would hit when I was out, and I would miss the whole thing. I day trade so I am constantly repositioning and I don't need anything close to 60 to get my money back. I am just trying to give traders ideas to apply to their own situation. Everyone has a different risk tolerance, financial situation, etc. With the information I provided, one can decide if it is better for them to gut it out, sell half or all at a certain price with the intention of buying back near the low, or chucking it all together. No one would blame you, no matter what you decide, as the current slide in GDX has been virtually straight down for 13 months, and falling from the high in gold hit 25 months ago.

    Other Thoughts

    My brainstorming has made me think about other strategies like dividing my trading funds each day in six parts. One or two parts can be placed in NUGT, one or two can be placed in DUST. That leaves a couple parts to add to which side is making money for the day (DUST or NUGT), somewhat similar to what Lefty6x6 does. Even without starting out trading both NUGT and DUST simultaneously, it would have been very, very smart to have added DUST along the way to counterbalance a good portion of the losses carried in NUGT. Yes, in the future, the moment losses start to mount, I must implement a strategy of adding DUST to my NUGT, or NUGT to my DUST, whenever I miss-time the turn. When DUST recently fell to 20, it popped up to 36, then fell back to 30.33, just above the 30 support level. I wanted to jump in and buy a bunch of DUST at the bottom there, but I had just started buying NUGT and did not want to look like a traitor and switch to some DUST. That was a big mistake that I do not plan to make in the future. Instead of letting your 2nd tranche of cash sit around collecting dust, buying the opposite side will balance you out and reduce your risk really fast. I hope these thoughts are helpful.

    Disclosure: I am long NUGT.

    Stocks: GLD, GDX, NUGT, DUST
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Comments (27)
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  • I dont think GDX will hit 17 or 18, (NUGT wiping out) without NUGT making one move up to 50 atleast. If you see the chart, its crying and waiting for upside. IT should happen soon. if GDX breaks below 22, its probably worth selling NUGT and switch to DUST to get the ride for GDX to hit 18 etc. and then switch back to NUGT where GDX hits 18.
    12 Oct 2013, 07:54 PM Reply Like
  • The estimate of the bottom should have high cost of mining considered as the new variable. If 1200 is the mark that most miners become unprofitable, in theory gold should not go much lower, probably 1000 is the end, that is another 21% drop. For gdx it is 18 if it falls the same percentage, which could be worse from the past experience. So the risk is dire, but it could take a year to get there.


    In the meantime, I believe 1200 is a good support for this year if physical demand holds up, so it could be the level to add more funds for a short term bounce to get even and out if you have losing positions.


    For me the best way is play the trend, which is bearish for now. I plan to day trade this thing for another 6-18 months to build up my capital while waiting for the bottom to form. Once it is there, all the patience and labor would pay off.
    12 Oct 2013, 09:04 PM Reply Like
  • Author’s reply » I make the following points. 1) In time, miners will adjust to lower gold prices, and you should start to see prices rise in GDX & NUGT even if the price of gold does not rise. This is due to an increase in profit levels. As profitability increases in miners, they will have to raise valuations. 2) Right now they are trading below book value, when they have traded at 3 or 4 times book value in the past. GDX could double in a short time if sentiment would just improve enough to allow a higher valuation based on book alone, regardless of a change in PE. 3)As high costs mines shut down, especially Juniors, supply falls below demand and that eventually raises gold prices. 4) At some point inflation returns to help force gold and miners higher. 5) Also, with the U.S. & world borrowing beyond their means, dollar devaluation will continue here along with all other countries in the world racing to devalue their currencies. That will cause gold to increase. 6) Long-term and I am just talking about in the next couple years, we could have a short squeeze in gold like no one has ever seen before, that causes gold to move up $100 per day for several weeks, and gold could rise to $3,000 to $5,000 almost overnight. This is partially due to unmet demand by Asia, India, and others. But it also is due to the fact central banks have sold out of their gold. Central banks loaned out their gold to make money, and they may never ever get it back. There are many who believe the coffers of central banks may not be totally empty of gold, but that they hold just a fraction of the gold that they r supposed to hold. The buying by central banks is not really to increase their horde, but instead is done so they have something to show in their coffers. Corruption reigns in the world, and how easy it would be if corrupt politicians around the world, stole much, if not all the gold supplies. There is never a true accounting for the gold, so not that difficult to accomplish.
    In conclusion, for the 6 reasons just stated, the predictions of lower gold prices in the future are not only wrong, the predictors (think Goldman Sachs) are extremely reckless to the point of being almost criminal. GS is probably one of the biggest buyers of gold now and into the future. The same people that got the world believing gold prices are dropping indefinitely, are the same ones trying to manipulate the price lower, forcing weak hands to capitulate. We could be watching the last few days of low gold and mining prices in our lifetime.
    Studying all those gold and mining articles recently, has rubbed off on me. I am starting to sound like them now, LOL!
    13 Oct 2013, 04:40 AM Reply Like
  • Rob :
    Above thesis may play out in the very long run. Investing in gold/mining stocks/GDX is a better option to benefit from it if you believe in it playing out.


    However, in the very short run we are holding a wasting leveraged asset such as NUGT and so having a precise timing is of importance when buying NUGT.


    You mentioned the other day that you first see a bounce in NUGT from current levels to $50 levels and maybe gold/NUGT may fall later. Can you elaborate more on this?


    Do you still see $50 in NUGT before $30? It's better to have a weekly target and scenario for these leveraged assets. Would appreciate your targets for next week.


    Also, another question. In the past you have mentioned to only hold these ETFs for a very short time-frame. However, if my understanding is correct you are holding NUGT in your core account for at least couple of weeks now. Is this normal is it just because of being caught on wrong side of trade?
    13 Oct 2013, 10:53 AM Reply Like
  • Author’s reply » Rod. I can look at the DUST daily chart and it looks like DUST could trade up slightly on Monday and then could turn down. That turn down would be not just a top, but "the top" for a very, long time. But we have been at this place for so long, I have stopped calling for a top in DUST and a bottom in NUGT. I have been wrong recently in my predictions so I have stopped predicting for now. This down current down move in NUGT & GDX is very entrenched. I believe it is being manipulated, but to this point, the bears have been winning. So now, I am just looking at worst case scenarios and not best case scenarios. Yes, I strongly believe we will see 50 before 30 in NUGT. I believe it more today than the day I originally said it. But I do not control the markets and so I could be wrong. I own core shares that I originally was day trading to obtain a lower price, but recently have just been holding, waiting for a better price. Just as I mentioned in my warning article with triple leveraged ETFs, I know that the core shares could indeed become worthless. I have therefore become even more vigilant with the trading shares and stopped buying any crazy shares until the bottom is in.


    I can't give you any weekly targets right now, but with the Republicans and Democrats miles apart in their negotiation, despite all the enthusiasm late last week for a settlement, and the debt limit fast approaching for Oct. 17th, I would not be surprised if gold finally showed real muscle to the upside. I would not be shocked if it rallied 100 or 200 next week, as Thursday approaches.


    Even if they do come to a settlement, I believe the economy has been so damaged that QE will have to continue throughout 2014 and may have to be increased. No taper now till 2015. When the market starts factoring that in, the sky is the limit. Sometimes in poker the pot has so much money in it, the reward is so great, that it pays to call the bluff of your opponent, even if they went all in. I see this as one of those times, where the odds for a gold metal and GDX/NUGT mining spike are so great, I am compelled to stay in to call the bluff of the market. Much bullish news (Yellen appointed, dollar weak, etc.) and gold has fallen instead of going up. I believe that is all about to change. In my mind, it is not if NUGT hits 60, but when. And 60 is probably way too conservative of a target. But until the tide turns, I must remain vigilant. I am going to gut it out. Others may want to place a stop and get out of half or all. However, I believe the Oct 17th deadline will be the catalyst that finally forces the issue and gets us to the bottom in GDX and NUGT.


    I see only two scenarios. We will either go down hard until we come to a settlement and then rally from then on for several weeks and months. Or with no settlement this weekend, panic finally sets in starting the beginning of this week, and gold finally begins acting like a safe haven. Unlike the media and the commentator crowd who sees gold falling in either scenario, I see the opposite. I see the next big move in gold being up and very much up. I will be shocked if we don't get to 1360 in gold this coming week. 1460 or 1560 or 1660, the sky is the limit if we default. If they play around too long, a last minute settlement may come too late and they might lose control of gold as the damage may already be done.


    I cannot remember the last time I was so happy to be long gold or gold stocks over the weekend. I hope this is helpful.
    13 Oct 2013, 12:33 PM Reply Like
  • Author’s reply » If the framework of a deal was worked out as early as Monday morning, Oct. 14th, House of Rep, Senate & President would be hard pressed to get a deal finalized by Oct. 17th. Time has run out. If a deal does not get worked out until Tuesday or Wednesday, we will probably go past the deadline of Oct. 17th and all I can say is, hold on to your hat!
    13 Oct 2013, 12:51 PM Reply Like
  • Author’s reply » This talk about 1000 or 1100 gold is nonsense. 1200 should offer tremendous support and we should stay in a range between 1200 and 1500 for the foreseeable future. They want to talk it lower so they can buy cheap. 1180 caused a bounce to 1425 so it will provide great support again if tested. If 1200 is the absolute bottom then we are 5% from the bottom at worst. GDX has so underperformed the metal, GDX could be higher than we are now with gold eventually trading 1200. The last few days buying has come into GDX and many miners and they are trying to outperform gold, which is a real switch.
    12 Oct 2013, 09:22 PM Reply Like
  • Author’s reply » I just found three more MUST READ articles by Steve St. Angelo: The Great Gold Heist Of 2013 and Energy Factor To Push Gold To New Highs and The Calm Before The Precious Metals Storm About anything this author writes is a must read!
    13 Oct 2013, 07:26 AM Reply Like
  • Rob,
    Thanks for the article and work you put into it!
    The chart indictates, and as you said, "the worst kickback took 2.5 months to snap back over 50%."


    I assume that the 50% rebound started after 2.5 months from the low price. So correct me if I am wrong, if history is a guide, once we hit a low in GDX, it could take 2.5 months to get a 50% rebound?
    13 Oct 2013, 12:27 PM Reply Like
  • Author’s reply » Exactly. It appears the tide is about to turn.
    13 Oct 2013, 12:52 PM Reply Like
  • I am in the same boat as other longs here. I was very hopeful on the predictions of Rob, but these were just predictions. They worked sometimes and did not some other times. When the whole market is talking negative about gold, going against the trend requires patience to bite the bullet and bleed into more losses before the tide turns. And often people going through this wait will win (especially rob who can reposition himself by day trading his positions unlike other longs who hold all of their core positions). One can argue that it is waste to hold these positions bleeding into down turn. Clearly breaking below 1300 mark was a sign of down turn. It is good to be optimistic about the upward move but unless you see a confirmation in reality (wait for a day or two of upward closures, confirming the bottom), the reward of the upward move will definitely be higher. Sailing through the downward turn, into bottom and then trying to recover into where it all began, may sometimes makes you re-think, had i wish i quit my NUGT position at 47$ and bought DUST, i would have been break even now. Lesson is : Don't depend fully on any one's predictions. Predictions are just predictions.


    I have seen that people are very good at predicting the opposite of what is happening in the market. "Trend is your friend, ride the trend". If you have taken a loss, sometimes it make it easier to recover by selling the loss and recovering it with couple of "market friendly trends" than waiting relentlessly on the tide to turn.


    Even when the tide turns, we sometimes quit in the middle of the ride up and expect the opposite of the market to take effect (eventually bleeding into whatever you have gained in that run).


    Don't trade on Rob's predictions. He could be wrong. He spends a good amount of time to give us great opportunties. Take it or leave, when establishing a position, always have a min target before you sell.


    ex: established position in NUGT at 46, keep 38$ as worst target to sell off. Remember, all trades dont turn profits. All moves will not be profitable. Similalry establish a target sell at 56 or if it turns back from 54 to downward trend, sell at 53.


    Long positions should be left as long positions. My examples are for short positions. When betting against the current market trend, always have a lower cutoff to get out with a loss. There will be some day where it will work better for you.
    13 Oct 2013, 02:45 PM Reply Like
  • Author’s reply » Very good thoughts AKM. One thing I was not aware of when this all began, was that so many traders don't have the ability to day trade. Had I known that, I would have advised taking protective action early on. I have learned how to aggressively day trade so I typically end up with more profits in the end, the more it goes against me initially. The secret is to stay solvent and keep losses low, which I have done on this down turn. For these overnighters, my article mentions how it is prudent to buy some DUST if losing on NUGT and visa versa, especially after a couple days of pain. After this current fiasco ends, I will strongly urge that in the future. Also, I will keep DUST & NUGT trades going simultaneously from the start.


    I got involved in NUGT & DUST to try and help small traders who easily get beaten up in these leveraged instruments. I now see that they need more help than I realized. When this current fiasco ends I am now seeing how they would be better off using option strategies using GDX calls and puts and GDX stock, over trading NUGT & DUST. I plan to discuss this further in the future but only after we get thru the current bottom as many like myself are already committed.
    13 Oct 2013, 03:55 PM Reply Like
  • Trading NUGT and DUST simultaneously will not work for recovering heavy losses (for ex: some one who established a position in NUGT at 55 - 61 range).


    There are two suggestions i have (those who cannot day trade):


    (a) If you have 10-15% loss (or the loss you think is something that you can take it up), quit the position in NUGT and wait for confirmation on trend reversal (at-least two up-days)


    (b) If you have 30% loss in NUGT now, then your best bet would be to leave it that way for next 2-3 months ride through the loss. The trend has to reverse at some time. But given gold's bearish fall breaking 1300, while people everywhere is predicting 1200 break, it feels odd to stay on this position. But it may be worth selling NUGT at a price atleast 50 than 38. I am confident NUGT will reach 50 at some point when the trend reversal happens.


    I am sticking to (b). Ignore your account for few days.
    13 Oct 2013, 04:45 PM Reply Like
  • Or option (c) this option is useful only if you have more funds to buy at lows. Buy nugt at 35, and every 5 $ down from then below. It averages down your total.
    13 Oct 2013, 05:01 PM Reply Like
  • An entry point would be when volume is over 80m shares for GDX and is trading up or stable for the day, that should be the bottom regardless if it is 22, 21, 18, 16. Whenever GDX traded around 80m or above it was a turning point in the last year.
    13 Oct 2013, 09:33 PM Reply Like
  • In other words, do not buy until a day sees this volume, it may have started after an average volume day and you may not hit the bottom entry price exactly but you are safer that way
    13 Oct 2013, 10:17 PM Reply Like
  • I would agree that the bottom is near and a good way of telling is when the volume spikes to a level to match or pass other turning point volumes, double or triple the average volume? for GLD, GDX, SLV, etc
    13 Oct 2013, 11:29 PM Reply Like
  • J Moneymaker, Volume could indicate the reverse trend only if you want to catch the perfect low. But when establishing long position we should not try to catch perfect lows, that's where greed increases the risk of loosing if it was just a false indication of bottom (bottom fishing).


    To be on safer side, waiting a day or two of higher closures and then establishing a position may avoid any sort of risk.
    14 Oct 2013, 12:06 AM Reply Like
  • Long time lurker - first time poster. Interesting reading for sure. Thanks for the continued commentary.


    One big question, how closely are GDX and NUGT related to gold. Often it seems close, but sometimes gold is up and GDX/NUGT still down. I keep reminding myself this is a 'miners' stock. Not too long ago, a new Corvette was $100,000+ and GM was bankrupt. Could we see $1500 gold and $15 NUGT or worse $1.50 NUGT? ie - a great disparity between the cost of the commodity and the stock representing the producers of the commodity?
    14 Oct 2013, 01:44 AM Reply Like
  • Newbie-
    Good question. Chrysler was one obviously 1 company. GDX is composed of about 25 gold miners (you can look up the weightings in a description of GDX). While some miners may suffer more than others with a decline in the gold price, other miner's have made changes to their operations, including closing less productive mines to lower cost of operations, to name just one example.


    So while there are temporary disconnects between the price of gold and GDX, ultimately rising gold will be reflected in GDX, IMO.
    14 Oct 2013, 08:35 AM Reply Like
  • the theory of the teeter totter --- one side goes up and the other goes down. Having both nugt and dust at the same time is the key. they both swing...its not as though one moves and the other stays stagnant and does not move.
    14 Oct 2013, 09:31 AM Reply Like
  • Lefty6x6, i would like to hear more about your strategy with an example of NUGT.


    ex: At 60$ NUGT, you bought say 200 NUGT and 300 DUST (both for equal price, say, 10,000$). You come to a point say NUGT = $49 and you thought that was the lowest point before NUGT could bounce, so you would essentially sell your DUST position when NUGT reached $49 (taking out profit). Now you still hold your original NUGT position at $60, which you are yet to recover.


    If you thought, wow NUGT = 45 is much lower than what i initially predicted, so let me put my DUST profits into buying another NUGT say 250 (price to average on NUGT), so now you have NUGT with an average price of around $51 - $52 where NUGT is trading now at $38.


    Do you just hold the rest of your NUGT shares to come up to break-even and sell?
    14 Oct 2013, 11:44 AM Reply Like
  • my strategy is to hold both essentially and because they work in tandem, sell the one that swings higher. then, depending on how much of the other I have already, I may take profits from the sell and buy more of the one that is down - I may not. then wait and sell the other one on it's inevitable upswing. recently, the sentiment has been 'down' making dust more likely to gain early in the day, so I look for that at the open. BUT.....there is normally a sizeable "pop" at the open one way (nugt) or the other (dust) so, when I hold overnight (I hold both if I do) -- I immediately SELL the one that has popped.


    in summary:


    1. I have and hold BOTH nugt and dust at the same time
    2. I view the two charts as "one chart" in that they move in tandem opposite of each other
    3. the teeter totter effect is daily...may happen in a matter of minutes, may happen in a matter of hours. BUT the simplicity is that is always happens.


    don't forget: these TOOLS are DESIGNED for their movement - they are designed to MOVE quickly and remain liquid ($ moving in and out...that's US)


    the big mistake is to only hold one or the other and get killed if that one drops sharply and suddenly.


    These two are hedges against each other in that if you are getting killed when nugt drops 3.00 in 6 minutes, dust will have RISEN about 3.00 and essentially lessened your losses, or even mathematically possibly provided an overall GAIN.


    the theory:


    hold both, understand them as one chart, when one side rises (teeter) - scalp a gain off of it, then as it falls and the other one rises (totter) scalp that one for it's gain.


    rinse, lather, repeat....


    the truth:


    it's not nearly as difficult as it is made out to be sometimes. the hard part is having the stones to make the calls and pull the trigger. I normally kick myself for selling (scalping) too early and taking a .40 cent gain per share, only to watch it continue to .75 cents and I left .35 cents per share on the table.


    rock on...
    14 Oct 2013, 04:15 PM Reply Like
  • exited all of my positions this morning from nugt, will have to see where things settle down.
    14 Oct 2013, 03:31 PM Reply Like
  • Author’s reply » We have been having slam down Tuesdays. I am not exiting, but I sure won't be adding any into the close.
    14 Oct 2013, 03:47 PM Reply Like


    There is definitely something fishy about these frequent gold smack downs at around the same time before stock market open. And that too these large sell orders are market orders!! That is just mind boggling. It definitely smells like manipulation. Is there something that we can do to get this investigated? Definitely we have some rights as many of us on the long side (NUGT) are suffering unjustly and should be able to sue if there is manipulation happening.


    14 Oct 2013, 07:12 PM Reply Like
  • After reading the comments and sincere advise / strategy both from Mr Rob and Mr AKM, I decided to come out from NUGT this morning taking some loss in 39.75 range. I have realized that this trading in NUGT abd DUST is a full time job and constant repositioning is required as Mr Rob and some other friends are involved. I have to attend 2-3 meetings on daily basis during trading hours which causes a lot of distraction. I am planning to buy NUGT as soon as the gold breaks 1300 level or it drops below 35. It is a wonderful forum where I learned a lot. Good Luck to every one.
    14 Oct 2013, 09:19 PM Reply Like
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