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A Path To Profitability For NUGT Holders

|Includes:DUST, GDX, SPDR Gold Trust ETF (GLD), NUGT

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 (NYSEARCA: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)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.