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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
  • December 2, 2013: Gold Mining ETF (GDX) Makes New Five Year Low. Now What? 15 comments
    Dec 3, 2013 12:32 AM | about stocks: NUGT, GDX, DUST, GLD, NEM

    (click to enlarge)

    Kevin Davitt of RCM Asset Management posted an article today that contained the above chart, click here to read the article. The chart shows some previous bear markets in gold that have lasted as long as the current one that has gone on since the Sept. 2011 top above $1900. What I find interesting is that the 38% correction that we hit a few months ago when gold bottomed just above $1180, is a substantial correction that has been longer than all but two corrections in the last 40 years. Both of those longer corrections lasted 5 years. But once they corrected over 35%, they had several bounces off the lows, some of which were substantial. Even if we should make marginal new lows in the very near future, looking at the 1988/1993 and 1996/2001 corrections, we should get a substantial rally in gold within the next 3 months or so. Also, the two long corrections never exceeded more than 40%. This makes me believe that $1180 support will hold as it represents a 38% correction, but if the support gives way, support at $1140 should not be violated as we would be at a 40% correction level at that point. I believe that the talk of $1100 or $1000 is not justified under any circumstances for a multitude of reasons. Most importantly, $1200 is below the cost of production of a majority of the major miners. Also, the cash gold market should really heat up with aggressive buying in Asia and India, should gold trade below $1200. When India raised tariffs and limited the amount of gold that could officially be purchased, they merely created an incentive to have gold smuggled into the country and truth be known, purchases are probably higher than they have ever been. China supposedly overtook India this year as the world's largest consumer of gold, but that only accounts for the official India imports. China had a good manufacturing report released Sunday night which means the economy there is doing just fine and can continue to provide support to gold through physical purchases which have exceeded 100 million metric tons for the past several months. These purchases cannot be ignored forever!

    I saw another article that I wanted to mention, where the writer calls the current action in gold miners (think GDX), an inverse bubble where the price cave-in is not realistic and has become frothy with so many shorts. Unfortunately I cannot find the article now but will continue to look for it. The shorts are doing quite well right now, but the lower we fall, the greater the rebound when the bullish bubble ultimately replaces the current bearish gold bubble.

    Many traders/investors have asked me if they should panic and leave now. With the extreme bearish action that so easily took out the support at $21.52 in GDX established last week, I don't blame anyone who decides to give up on the miners. Also, anytime one is panicky or one cannot sleep, never hurts to sell out 50% to raise capital to buy back lower at some future date. It is everyone's own choice as to what they want to do. But for me, I will be waiting it out, holding onto GDX/NUGT/NEM in anticipation of better prices to sell in the near future. I am not only holding the unleveraged positions, but the leveraged NUGT too, based on the following weekly chart of NUGT.

    (click to enlarge)

    In April 2013, NUGT stopped dropping at $96.10, bounced back to $142 the following week, then worked lower to $81.30 just 4 weeks later, bounced back in a couple weeks to $124.20 to let the traders who bought in the $96s and the $81s both make money.

    But what happened next is quite remarkable. Suppose someone bought when NUGT retraced back to the $81 support area in the middle of June. The support gave way, and a couple weeks lower, a low of $45.50 was realized. In 4 weeks, NUGT rallied back to $85.70, allowing anyone who bought at $81 to get out at a profit. Then after a selloff in two weeks to $50.30, NUGT rallied quickly to $103.90 in a week, and hit $106 two weeks later. What is remarkable is that NUGT could fall from $124.20, straight down to $45.50 and then rebound to $85.70 and $106. Comparing all this to the recent high of $59.87, to fall similar percentages, we could go from $59.87 high to a low of $21.93 (drop of 63.36%). From the low of $21.93, NUGT should rally 88.3% to $41.29. Then work on up to $50.07 and $51.09.

    Here is another thing to consider. When a trader buys at a support level that is broken, a future rally still lets the trader out. For instance, had one bought NUGT at the $96 support and a new low was made down to $81, a rally to $124 bailed out the trader who was holding long from $96, the previous low. NUGT rallied 29% above the $96 purchase price. Then when $81 and $45.50 were the last two lows, anyone holding from $81 could get out at $85.70 and again at $103.90 and $106. The $106 price is 30.9% above the $81 price. Then when $45.50 and $37.83 were the last two lows, the rally to $59.87 bailed out anyone long from $45.50. The price of $59.87 is 31.6% above the $45.50 price. So now if we should fall to $21.93 having broken the support at $37.83, anyone long from $37.83, should get out on a move between 29% and 31.6% above the $37.83 price, which works out to a rally back to $48.80 to $49.78. Anyone long NUGT in the $41 area would appear to have a good deal of breathing room, if history continues to repeat. The percentage move above the previous low keeps rising slightly so the next kickback from wherever we bottom, should be 33% above the previous low of $37.83 which computes to a rally to $50.31. One never knows where the current low is going to be, but the previous low is always known. And NUGT for three previous cycles has rallied 29%, 30.9% and 31.6% from the previous low. We know the previous low was $37.83, so one can expect a rally back towards $50 in NUGT, based on these calculations, without having to know the exact bottom of the current downturn. I hope this is helpful.

    Disclosure: I am long NUGT.

    Additional disclosure: Also long NEM & GDX

    Stocks: NUGT, GDX, DUST, GLD, NEM
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Comments (15)
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  • developer786
    , contributor
    Comments (9) | Send Message
     
    Thanks for your input and research. Please let us know when the reverse split is going to occur. Do you know how and when direxion splits NUGT?
    3 Dec 2013, 01:26 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (400) | Send Message
     
    Author’s reply » There is a very good chance we bottom in here shortly and a reverse split never occurs. We would have to fall substantially more than we r now in GDX to pull NUGT low enough to consider enough reverse split. Next reverse split more likely in DUST than NUGT IMHO.
    3 Dec 2013, 05:23 AM Reply Like
  • metalhead
    , contributor
    Comments (36) | Send Message
     
    Good luck ... I suspect total capitulation on the part of gold bulls is near, but we might need another washout day like yesterday to completely bottom.

     

    I plan to start slowly accumulating miners over the next month.
    3 Dec 2013, 06:04 AM Reply Like
  • Tradestrong
    , contributor
    Comments (22) | Send Message
     
    wow. amazing article with impressive analysis. Go Robert, Go...
    thank you so much. Robert.
    ;)
    3 Dec 2013, 05:25 PM Reply Like
  • Lefty6x6
    , contributor
    Comments (34) | Send Message
     
    RE is right (as if that was news...) - reverse split in DUST more likely than in NUGT. The reality is that sooner rather than later, I suspect that the entire industry will be in a decent sized M&A mode. Specifically - but not entirely - for the cost reductions and efficiencies that are to be had. Cutting costs on the production side, while consolidating and reducing output (reducing supply) should serve as modest catalysts to bump gold prices higher. NUGT - remember - is NOT sensitive to only the price of the yellow rock...NUGT is the MINING COMPANIES that pull the yellow rock out of the ground. If their business (read: costs vs revenue) are lousy, then the business is lousy....if enuff of the companies that do the same business are equally as lousy, then you get what we have been experiencing lately. NUGT reflects the health of the companies...NOT the retail value of the yellow rock.

     

    M&A (read: big fish eating little fish) is IMHO - a foregone conclusion that should begin soon. Efficiency, production cost reduction, and being able to operate at (hopefully above) the break even line is what NUGT reflects.

     

    If you have 10 houses on your block, and 7 of them are dilapidated, non maintained, crap boxes...the 3 that are attractive are only going to be 'valued' and as 'sellable' (and profitable for you to sell) as the neighborhood is perceived.

     

    Essentially, those other houses can / are bringing your houses value down.

     

    Same with the mining companies, ergo the need for M&A to clean up the neighborhood, bring higher efficiency and thus increased value and profitability.
    4 Dec 2013, 09:02 PM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    Dear Robert, I have bought around 250 NUGT at $33 and some at $27 . What are the chances of NUGT reaching back to $42 level. The Gold stock took a toll in Nov 2013 and Dec 2013 is not going good.
    6 Dec 2013, 10:09 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (400) | Send Message
     
    Author’s reply » Chances are quite good NUGT returns to $42 level as long as NUGT stays above $20. If NUGT starts hitting $19 or lower then it will be increasingly difficult to recover much to $40 and above. However if we bottom where we are now, $50 is a good target price.
    7 Dec 2013, 09:21 AM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    I would like to see how accurate is your call. According to you,you have long position in NUGT too. What are the chances of a reverse split and what would you do in case the price fall below $19?
    8 Dec 2013, 12:18 PM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    Dear Robert,

     

    Gold fell below 1,200 and NUGT around $24. What is your take on
    NUGT now?

     

    Are you still holding NUGT?
    21 Dec 2013, 08:27 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (400) | Send Message
     
    Author’s reply » Already answered the question. Still looking for $1155 or $1180 to hold as bottom in gold. Still looking for NUGT target of $50. On rally GDX should outperform instead of underperform as has been the case for eternity.
    23 Dec 2013, 11:55 AM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    Thank you.Now at $27.
    24 Dec 2013, 02:14 PM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    Dear Robert, You are a genius .Thanks for your continuous reply.
    12 Feb, 03:21 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (400) | Send Message
     
    Author’s reply » Looking much better now and still looking for $50 and much higher later.
    12 Feb, 09:26 PM Reply Like
  • Lumia_920
    , contributor
    Comments (76) | Send Message
     
    Mission accomplished :)
    16 Feb, 02:37 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (400) | Send Message
     
    Author’s reply » Thank you.
    16 Feb, 12:23 PM Reply Like
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