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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
  • Despite Lower Prices In Gold & The Miners (GDX & NUGT), Bullish Undertone Persists  16 comments
    Nov 9, 2013 12:05 PM | about stocks: GDX, NUGT, DUST, GLD, NEM

    I was bearish gold and the miners in my last two instablogs, found here and here, and encouraged the purchase of the bearish triple leveraged gold miner ETF (NYSEARCA:DUST) over the triple leveraged gold miner ETF (NYSEARCA:NUGT). However, I did not totally trust my own advice and prematurely switched into NUGT and bought Newmont Mining (NYSE:NEM). The reason for my early switch from the bear to the bull camp, was initially the fact that gold was holding solidly above $1300, and appeared to have a bid under the market. But on Thursday's bearish news, gold broke under $1300 to $1295, but quickly traded back towards $1312. At that point, I was convinced things were looking up. Then more bearish news on Friday, killed the gold comeback rally. Still, as we broke down towards $1280 late in the week, the selloff was quite orderly. In addition to gold, the miners showed great relative strength, especially on Friday, when Newmont Mining (NEM) shook off the negative news and actually closed up for the day, along with NUGT.

    Another factor that turned me prematurely bullish the miners, was the fact we had important reports to be released late in the week that could support gold and the miners. I was afraid to be short GDX or long DUST, with the excellent chance that news would be supportive to gold. It turns out though, virtually all of the news that came out, was negative to both gold & the miners. On Thursday, 11/07/13, there was a strong GDP report (2.8% vs. 2.0% expected) but the extra .8% was nothing more than inventory restocking which could languish on the shelves. The 4th quarter GDP should be weaker due to the government shutdown and business inventory drawdowns. In Europe, the ECB on Thursday actually lowered rates, which came as a shock (to me at least) since the ECB rarely ever does what is expected. The GDP report pushed the expected quantitative easing taper date up a bit, and the ECB decision helped the dollar strengthen. Undeterred, I bought the triple leveraged gold miner ETF (NUGT) on Thursday at $43.70. Confident that the government shutdown would probably depress the Friday employment numbers, I wanted to buy ahead of the Friday report. But Friday's employment report was strong and not weak at all. This caused gold to sell off on Friday, see the chart:

    (click to enlarge)

    To figure out the implications of this large black candlestick breaking solidly under $1300, just look at other black candles that broke support. Counting the 8th candle of September, when we broke support of $1360, we had 3 additional down days before turning higher on the Sept. 18th "no taper" FED decision. Then on the ninth trading day of October we broke under the $1280 gold support area. We would go sideways to lower for 3 days prior to exploding out of the bottom. I again am looking for 3 days of sideways to lower action in gold. Thus, you want to be long by Wednesday, 11/13/14, because on Thursday, we should explode higher in gold.

    Back to Friday's trading, NUGT fell to $39 soon after the stock market opened. I would eventually buy NUGT again at $40.04 to average down my $43.70 purchase of Thursday, to $41.87. Thanks to a late day rally, I was able to get out of NUGT at breakeven. But NUGT continued rallying to the very end of the day on Friday, and closed $43.27, up 74 cents for the day. Take a look at the daily NUGT chart:

    (click to enlarge)

    On Friday we gapped lower and continued to fall to an extreme low of $39 in NUGT. But then we rallied back to fill the gap and actually close up for the day. To find a similar pattern in the recent past, Friday's doppelganger is 10/09/13, marked as "D" on the above chart. At that time we moved lower for 3 trading days before exploding out of the bottom. Just like in gold, NUGT is projecting a 3 day drop before moving strongly higher. Other examples of similar action is the 6/21/13 bar marked at "A" in the above chart. Also note the action of 9/11/13, marked as "C" in the above chart. Both times we find 3 down days before moving up. For A & C, there was a small up day followed by an explosion up the following day. If we follow this pattern now, Thursday, 11/14/13 may be a small up day and Friday, 11/15/13 is the explosion higher. Whether the explosion higher occurs on Thursday or Friday, I will be set up for the long side by Wednesday's close, 11/13/13. Early next week, I will probably start by gradually selling out of the money NUGT puts, then add NEM and NUGT shares. Late Friday in Stock Talk, I warned that we would probably have to retest Friday's low on Monday, despite the strength we were witnessing. Thus, late in the day I sold 27 strike NEM calls expiring next Friday, for 70 cents, to protect half of my Newmont Mining shares, and bought some DUST in the aftermarket to balance out the rest of my position. I will be cashing out of DUST and buying back the puts, early next week. After a week of confusion, the future path for gold and the miners appears to be quite clear. It will be fun, and hopefully profitable, if the scenario that I am describing, pans out.

    Disclosure: I am long NEM.

    Additional disclosure: I am long some DUST and short some NEM calls over the weekend, but will be hopefully taking profits on those and then aggressively buying NUGT/GDX/NEM in the next few days, along with selling NUGT puts.

    Stocks: GDX, NUGT, DUST, GLD, NEM
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Comments (16)
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  • Robert Edwards
    , contributor
    Comments (483) | Send Message
     
    Author’s reply » Found an excellent article expressing the bullish case for gold, here on SA, click http://seekingalpha.co...
    9 Nov 2013, 12:42 PM Reply Like
  • glaserdx
    , contributor
    Comments (212) | Send Message
     
    Rob- thanks for the update and outlining your strategy. I am long NUGT and will think about holding, adding or selling & repurchase
    9 Nov 2013, 02:54 PM Reply Like
  • rodh7858
    , contributor
    Comments (138) | Send Message
     
    Thanks for a great article Rob. I bought 100 NUGT on Fri and towards the end of day rally sold OTM covered call on it expiring next Fri.
    If the scenario you have described pans out with NuGt falling early next week then it will be perfect for me as I should be able to buy the call back for cheap by Wed and pocket the difference. Then I can sit on NUGT to explode Thurs and Fri.
    The bad scenario for me would be if NUgt keeps rallying and keeps exploding all week. In that case I will just let NUGt get called away . I will only make a small profit by keeping the call premium and the strike price difference with purchase price.
    9 Nov 2013, 09:07 PM Reply Like
  • njtoms
    , contributor
    Comments (22) | Send Message
     
    Sorry, just another thought. In Your last InstaBlog of One Week ago.
    You Stated that You thought GOLD would Bottom around 1280-1300. It Did. Why are You Now Changing Your Position? Again, GDX Rallied from the Lows on Friday to Close Higher than Thursday's Close. While GOLD was Down $18 Bucks from Thursday. What Am I Missing from Your Analysis? Much Thanks/Noel
    10 Nov 2013, 10:00 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (483) | Send Message
     
    Author’s reply » Noel, thanks for making a very important point. Remember, all
    predictions made are based on the best information available at that time. As time goes by and new information comes in, some minor (and occasionally major) tweaking is advisable.

     

    Now, buying DUST is for very short-term protection of bullish positions that were put on too soon. I am not advocating buying DUST outright as a trade. It is insurance against a very short-term downward move that looks like it will occur do to particular news, technical price action, and patterns that have been identified.

     

    There is a good chance that gold will indeed bottom at 1280 and we will go up from here. However, there is a greater chance that we will have three days of consolidation before we move higher. The consolidation is more important regarding time than price, and GDX, NUGT, etc, may not fall all that much. In fact, we might just retest the lows of Friday in NEM, AEM, etc, and not make any new lows for this current down move. But for those who are long at the high end of Friday's range or a bit higher, it is prudent to protect their position with covered calls (I sold in the money calls in NEM for half my position) or buy a small amount of DUST. Covered calls slightly in the money only protects one for 50 to 65% of any down move at best, so I also added some DUST in the mix. If we fall a bit in here, I am still only 60 to 80% protected, and much less than that if we fall hard. After the early Friday action that had NEM under 27 and AEM under 28, it is prudent to take some protection when the market allow one to do so.

     

    On Thursday the miners were weaker than the gold metal (Dow Jones & S&P stocks were weak) and Friday the miners were stronger than the gold metal (Dow Jones & S&P stocks were strong). That is probably why gold miners were so strong on Friday. Also, Friday option expiration was a key. Monday morning, if the D Jones & S&P stocks are strong on the opening, miners could be too for a short time, but I would expect a good deal of Friday's early negative action needs to be retested later in the day. Also, it is not just the price that gold hit on Friday, but the action of falling into the 1280s and being unable to move back closer to 1300. On Thursday, remember, when we broke support of 1300 and then rallied to 1312 in gold, I warned traders to abandon DUST and in fact, I bot some NUGT. It was only Friday's further selloff in gold that did not bounce, and the strong late rebound off lows Friday in the miners that made me want to protect myself from Monday downward volatility. Just as I initially shorted NEM calls to protect my many short puts, I quickly abandoned them the moment I saw everything was fine. I will do the same with DUST on Monday. If I see that it is not needed, I will dump the insurance.

     

    There is another rule at play as well. On Friday, I was short many puts that were far into the money near the opening. Had we remained weak, I would have been exercised and long a good many shares of NEM. I am totally confident in my ability to sell calls and day trade out of the position, but it would have been a challenging situation to say the least had we not rallied on Friday to at least close at 27. When one is dangling over the edge of a cliff and a savior appears to rescue you, it is prudent to take the hand of rescuer and leave the cliff. When one makes a mistake and gets a chance to greatly reduce the risk, always use the opportunity to reduce your risk. And never kick a gift horse in the mouth. As a former heavy commodity trader, I learned a long time ago that if I get long a commodity too soon and suffer a short-term loss, on the first rally, either partially or fully spread off, or liquidate the position to reset the clock or at least give yourself a time out. Buying DUST in the current situation and selling calls was a way to lock in the rally gift I received on Friday.

     

    The moment that I get the all clear signal that we have bottomed, I will announce it with a warning in Stock Talk. Till then, I will remain cautious.

     

    Thanks again for your comments because if you had this objection, others surely did too, and it is a very valid objection to have and I sympathize with you. But during the last selloff when I carried readers with me in NUGT, from the high 50s to the high 30s, I failed to suggest any protections in DUST or with options that could have greatly reduced the risk and lowered the break even. I will not do that again. If you don't need protection in DUST then by all means do not take it. It should only be used for those who want or need some insurance. I am playing large enough that it is prudent to take some insurance.
    10 Nov 2013, 11:09 AM Reply Like
  • njtoms
    , contributor
    Comments (22) | Send Message
     
    Robert,

     

    You have been Very prescient on your GDX/NUGT Strategy.
    But Today, I have to Disagree. Gold was down $18 on Friday.
    Yet, the GDX closed Higher than the Previous Trading Session and
    On Substantial Volume. Perhaps, the Miners Have Dis-Connected from Gold? I would Not be Buying DUST. jmho/Noel
    10 Nov 2013, 10:00 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (483) | Send Message
     
    Author’s reply » As I mentioned in the previous comment, miners were helped on Friday by option expiration, and strength in the overall market. They may not enjoy these benefits early next week and will likely correct a bit of their bullishness displayed on Friday.
    10 Nov 2013, 11:18 AM Reply Like
  • cnype
    , contributor
    Comments (10) | Send Message
     
    I think the employment numbers was good for the stock market overall, while being an ominous sign for the gold metal... that's why the GDX was torn between the two.
    11 Nov 2013, 08:19 AM Reply Like
  • WallysWrld
    , contributor
    Comments (4) | Send Message
     
    Another fine game plan RE makes sense to me. I bot NuGT too early Thur, avgd down Fri, will try 2 sell my 44s Mon early if opportunity arises, then reposition down b4 Wed. If not I, may have to hold the bag in NuGT while it goes lower a few days :(.. Thanks for your hard work/research.
    10 Nov 2013, 10:24 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (483) | Send Message
     
    Author’s reply » Good news is we r showing bottoming signs even as we fade a bit in here, and any downward correction should b quite shallow. Any NUGT buys under 45 should b redeemed shortly.
    10 Nov 2013, 11:20 AM Reply Like
  • glaserdx
    , contributor
    Comments (212) | Send Message
     
    Rob-we all learn from your strategies. Thanks for that response to Noel.
    Have a target range for NUGT?
    10 Nov 2013, 03:20 PM Reply Like
  • newbie872
    , contributor
    Comments (5) | Send Message
     
    Will certainly be fun to see what the future holds. Interesting thought on the disconnect, nj. I had touched on that a bit earlier asking if gold could maintain value and GDX turn worthless in the same way a new Corvette is $100,000, but GM is bankrupt.

     

    Looking at Gold:GDX ratio, in the '06-'07 time frame it hovered around 16:1. With the crash of '08 gold fell a little, miners fell a lot and the ratio peaked at about 44:1 before returning to the low 20's:1 in '10. Starting with the latest gold sell off in Sept '11, gold has fallen in value by about 1/3, while GDX is down about 2/3, so the gold:GDX ratio is now in the low to mid 50's.

     

    Or to look at it 'straight across the board' - the last time gold was in the $1300 range (Q4 '10, and gold was rising fast), GDX was in the low/mid 50's and rising equally fast, and the ratio was about 22:1.

     

    So either GDX was substantially overvalued back then, or hideously undervalued now. Or a little of both!
    10 Nov 2013, 09:25 PM Reply Like
  • cnype
    , contributor
    Comments (10) | Send Message
     
    Correlating the value of GDX to Gold and expecting the ratio to be constant over time is dangerous.

     

    GDX is an index, while Gold is an actual dollar value. GDX is affected by the performance of its contituent companies, while gold is not.
    11 Nov 2013, 08:18 AM Reply Like
  • rxraider
    , contributor
    Comments (28) | Send Message
     
    Bought DUST 2 weeks ago at $25.56. Sold some at $34.50 and the rest for $36. Will place a buy order below $40 and try to get NUGT before GLD and GDX bounce back.
    11 Nov 2013, 12:19 AM Reply Like
  • newbie872
    , contributor
    Comments (5) | Send Message
     
    ...also since the recent gold low in June '13, gold has recovered about 8% of it's value, GDX has recovered about 3.5%

     

    So a couple of things may happen:

     

    1) GDX may be due for a little positive movement, even though gold remains steady. 2) A small upward movement in gold could trigger an exponential upward correction in GDX (sort of what we saw Friday) 3) GDX could become even more disconnected from gold and the ratio slip even higher (ie GDX slip downward at an increasing rate).

     

    I would tend to favor 1 or 2 if gold can maintain an upward run, or 3 if gold turns down again, though I am far from expert!
    11 Nov 2013, 12:19 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (483) | Send Message
     
    Author’s reply » One thing that makes the comparisons difficult is that when the gold price hit 1900, the miners imagined we were on our way to 3000 and eventually 5000 or 10000 and they spent money like drunken sailors overpaying for assets and squandering so much capital. The excess is being worked off now. I do believe they are undervalued none the less, but probably only about half as undervalued as it would otherwise seem. Half their devaluation is probably justified based on the way they mismanaged.
    11 Nov 2013, 12:23 AM Reply Like
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