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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 Today's Breakout, Gold Miners (GDX) Still Facing Significant Resistance 16 comments
    Mar 14, 2014 1:05 AM | about stocks: DUST, NUGT, JDST

    (click to enlarge)

    If you read my last article submitted 03/03/14, click here, I was buying DUST to fade the gold miner rally I was seeing that appeared to be losing steam. That worked out well for several days, as GDX went mostly sideways and DUST rallied up to $20.76 on Monday, 03/10/14. Despite the fact Americanbulls.com had chosen to take their loss on their short DUST position and go long on Monday, click here, I elected to liquidate all of my DUST shares at a profit in the aftermarket. I was spooked thinking that since Americanbulls.com (a trend-following system) had now just gone long DUST, it was probably time to liquidate as we were not trending, but were caught in a trading range. Americanbulls.com has been chopped up and losing money on a majority of their gold trades, for several months. When DUST could not add to its gains on Tuesday, I was pleased by my decision to get out.

    Then on Wednesday, 3/12/14, April gold futures broke through the $1355 & $1361 resistance, and rallied to above $1370, but GDX could only get back to the $26.90 resistance area. With the breakout, gold could potentially rally to the next resistance levels of $1400 & $1435. The gold mining ETF (NYSEARCA:GDX) could therefore rally to major resistance at $28.00 and might eventually challenge major resistance at $30.00 & $31.00.

    On Thursday, 03/13/14, the Ukraine situation heated up, rallying gold and the miners. GDX closed nearly on its high of $27.64. Gold struggled to take out resistance at $1375. I added some DUST shares in the low $18, to the DUST shares I bought the previous day in the mid $18s. But when $18 support was taken out, I did not add any more shares today. DUST eventually closed at $16.94.

    What Is Next?

    If you check Americanbulls.com, you will see that when they got stopped out of their long position on Wednesday, they went short DUST at $18.50. That turned out to be a good move since GDX broke out to the upside Thursday and DUST made new lows. Lets take a look at the GDX chart now:

    (click to enlarge)

    Looking at the chart you should notice that when GDX bottomed at $22 in late June 2013, we got an initial rally to $25, a correction and then a rally to $28. After falling back just under $24, GDX then rallied to $31. Just as the $28 area presented significant resistance last summer, I believe it should now as well, especially since there is a September high of just above $28 that turned GDX lower as well. GDX struggled mightily to take out resistance at $27, and should find significant resistance at $28 as well. We have rallied three days in a row in GDX and it has been over a month since that occurred. I am hopeful that Friday is a correction day down in GDX, although we might make a new high first.

    The year of 2014 is sure nothing like the year of 2013 in GDX. Back then, all rallies were followed by severe corrections. But since bottoming at $20.18, in late December 2013, only mild corrections of $1 to $1.30 have been seen in GDX. At $28 or a bit higher, I still expect to see GDX hit significant resistance that causes a significant selloff of as much as $3. The corrections in gold futures have also been quite mild. At some point, either from a high of $1375, $1400, or $1435, I am looking for a $100 correction in gold as well. That correction in gold, when it does come, should cause GDX to correct significantly down, causing the triple leveraged bearish gold mining ETF (NYSEARCA:DUST) to soar higher.

    What Are The Chances Of A Gold Mining Correction In The Immediate Future?

    A lot depends on Ukraine right now. There is a weekend succession vote that could spark some violence. If things accelerate we might get a further pop in gold and the miners. If a standoff continues and things don't worsen, expect gold and the miners to give up their safe haven premium and go down.

    At Kitco.com I found an article by Debbie Carlson entitled, Gold Physical Demand Stays Subdued As Prices Rally, click here. I strongly recommend reading this article carefully. It explains why being long gold and miners right now, is not a slam dunk winning trade. When things calm back down, the rally could disappear almost overnight. Also speculators are already heavily long gold right now and will have to find even more buyers to keep this rally going. The Chinese appear to be waiting for a correction to buy the physical, and India purchases remain constrained by tariffs. Also, more supply will be released into the market in the immediate future, to take advantage of the recent price rise. At some point, although the gold metal house of cards may not collapse, it will surely need to retrace back towards $1300 to build a base before rallying to significantly higher levels.

    My view? Well, I disagree with the current consensus view described in the media. Weakness in China is sited in the article as being a bullish factor for gold, but I disagree. Weakness in China should translate in my mind, to fewer gold purchases, and not more. It might be bullish in the very short run, but in the long run, it is surely bearish. Gold bulls should want China to be prosperous to have the means to be able to remove more gold off the market.

    Another factor I find interesting is that during the Ukraine crisis, the Euro has rallied against the dollar. If hostilities actually broke out, I see a flight to the safety of the dollar, and not the Euro. If sanctions are brought against Russia, Russia could shut off natural gas to the West, and it could cripple the economies of Europe, further hurting the Euro at the expense of the U.S. dollar. If things get out of control and there is bloodshed, I see all stocks falling in our stock market across the board, including gold stocks. Nothing should be spared. In my opinion, the Euro has rallied so far because the market assumes that Russia is merely posturing, and playing a game to try and achieve some strategic advantage, before a settlement is reached through diplomacy. If diplomacy wins, then things should settle down and gold and the miners should slip back lower. If diplomacy fails however, in my opinion that would be very bullish the U.S. dollar and very bearish gold and the miners and they should get killed. For that reason, I will continue to play DUST rather than NUGT, as the ultimate solution to the Ukraine situation is either a little bearish or extremely bearish, gold and the miners. That is just my opinion and I might be proven wrong. I welcome any counter arguments that will explain to me why I should be bullish miners right now.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Disclosure: I am long DUST.

    Stocks: DUST, NUGT, JDST
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Comments (16)
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  • vfc1955
    , contributor
    Comments (47) | Send Message
     
    I have followed your articles but have not shared your pessimism on GDX until yesterday.
    Closed my GDX position and opened a small position in DUST.

     

    The Germans have warned the Russians for the first time of "massive" economic consequences. This is unprecedented over the past 70 years. Cooler minds will percolate in the Kremlin as the Russian Elite realize it is their pocket book that will suffer massively.
    14 Mar, 01:33 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » Remember last year when DUST was all the rage and NUGT could not catch a break? DUST kept soaring higher and NUGT got cheaper and cheaper. We had two reverse splits to prop up the price in NUGT. Well, things have sure changed. Now DUST looks like it is in trouble and NUGT looks unstoppable above $50, similar to what DUST looked like not that long ago.

     

    When the triple ETFs get extended in price to the upside on one side (NUGT) and to the downside on the other (http://bit.ly/155aj6X) it becomes safer to play the cheaper one and try to catch the turn back up, like I am doing now by buying DUST. The cheap prices of DUST that keep getting cheaper, works in the favor of a scale trading buyer who has to put up less capital as the cheap side falls. Also, each percentage drop is fewer and fewer points as DUST gets lower and lower. NUGT on the other hand gets more expensive and ta one percent move, a greater and greater number of points. And when the downturn comes in NUGT, many a trader will get caught in NUGT like they did in DUST just a few months ago wiping out all of their gains and maybe more. For now, I will catch the DUST falling knife and reposition by buying down and selling out partially on rallies to lower my price. I should soon get rewarded.

     

    Recently DUST fell to just below $18.50, but then rallied to $21, then repeated the action but only got to the mid 20s, the 2nd time. I expect that if $28 is significant resistance in GDX and it stops rallying just above $28, DUST should stop falling about $15.80, and then should rally back towards $18.50, in short order, allowing me to get out of my low priced DUST shares at a profit (I will be buying shares down to the very lows), and my high priced DUST shares ($18.40 average) at around break even. That is the plan anyway.
    14 Mar, 06:55 AM Reply Like
  • vfc1955
    , contributor
    Comments (47) | Send Message
     
    Outstanding discussion. Thank you. I will bear your thoughts in mind over the next few months.
    14 Mar, 07:20 AM Reply Like
  • rxraider
    , contributor
    Comments (28) | Send Message
     
    Nice work, RE. Added to JDST at $13.99. Hopefully gold and the miners start correcting in the next few days.
    14 Mar, 10:19 AM Reply Like
  • Tradestrong
    , contributor
    Comments (22) | Send Message
     
    bought JDST again. here @14.15. we might see profit taking today. since all the bulls made tons of money since the beginning of the year. they might not want to risk their gains to the Russia's problem. one more thing to note is gold pop 10or 15 $ gdxj gdx were not be able to catch up. this showing weakness of buyer. hum... very interesting here.
    14 Mar, 10:34 AM Reply Like
  • Lefty6x6
    , contributor
    Comments (48) | Send Message
     
    ....it's as easy as riding (and hopefully not falling off...) of a tetter totter !

     

    Long live NUGT and DUST !
    14 Mar, 02:51 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » I agree Lefty. Take the money you want to invest in the triple gold miner ETFs and put 1/3 in either DUST or NUGT, and the next 1/3 in the other side. Then put final 1/3 in which side is winning. Use pops on each side to take profits. Can't beat it! Sure better than adding more and more to the same losing side and getting your hind end kicked waiting to try to get your money back.
    14 Mar, 03:37 PM Reply Like
  • vfc1955
    , contributor
    Comments (47) | Send Message
     
    Gracias for the strategy
    14 Mar, 03:52 PM Reply Like
  • mattitan
    , contributor
    Comments (9) | Send Message
     
    To The Author: I do not understand your reasoning for being bearish on Gold and the Miners based off of the events in the Ukraine. I would think that if things escalate into "bloodshed" that there will be a significant rally in gold and therefore in the mining sector. Can you please explain why you feel the opposite?
    14 Mar, 03:52 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » Conflict & bloodshed is destabilizing to institutions in the civilized world. Gold miners are institutions and although the gold metal might catch a quick pop, the miners are not helped with bloodshed as it decreases net gold purchases. Supply increases and pulls down the price of gold in the long run. Short run you might get a quick pop but long-term I see it as bearish.

     

    Russian sanctions will probably hurt Europe as much or more than Russia. Russia raises nat gas prices or refuses to supply the gas. Euro falls, U.S. dollar rallies, gold falls.

     

    Reiterating about China, if China is weak they will lack the money to buy as much gold coins or bars and that will also hurt gold prices. Gold bulls should want a strong China and not a weak one.
    14 Mar, 05:43 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » After opening on the highs of the day at $28.00 (resistance as predicted), GDX sold off hard, filling the gap and trading down 21 cents, before closing up 10 cents. When DUST opened in the premarket at 4:00 a.m. EST, gold was down and DUST popped up a bit. I should have sold into that strength because GDX gained strength and opened near highs while DUST opened weak, near its lows.

     

    Having missed that opportunity, later in the day I did sell out 50% of my DUST position at $17.08, with the intent to buy the shares back under $16 to reposition and lower my average price in DUST. If DUST keeps rallying instead, I would add the loss amount to the remaining shares and sell out in the high 19s. Well, near the close I bought back, down to $16.75 so I have my original shares back on & pocketed a scalp trade profit. I bought back because in the recent past (Jan & Dec) when we closed down 4 straight days in DUST (like today), we closed up the 5th day, and then down the 6th & 7th day. So I am looking for strength in DUST on Monday, and maybe weakness the next two days. If DUST rallies on Monday I will probably again sell out half my position on strength to set up the win/win situation I like to do.
    14 Mar, 05:54 PM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » Had I added on the opening at $16.20 area, I could have lowered my average to $17.30s and been able to nearly break even on the highs. I decided not to add on the opening out of caution. If gold miners (GDX) keeps rallying straight up to $31 with no correction, then DUST could potentially fall to $10. I think that is a very low probability of happening. Still, I want to be prepared in case it does. I already bought some DUST in the $18s, and will now buy in the $16s, the $14s, the $12s and even the $10s. Surely from $31, GDX will finally put in the significant $3 to $4 correction that I have been looking for. So if DUST should fall to $10, I plan to buy all the way down and then ride back up to the $18 level and higher.

     

    When playing the triple ETFs, one must either scale in trade and be prepared to buy down to 50% of the price you started at, or one needs to be more balanced and play the teeter/totter. The teeter/totter involves putting 1/3 of your leveraged mining funds in DUST or NUGT, the next 1/3 in the opposite pair you have not already purchased, and then the final 1/3 of your funds in the side that is winning. This way, if losing on 1/3 of your funds in DUST lets say, you can balance out with the next 1/3 in NUGT, and then add to the winner rather than the loser. This keeps one from blowing out their account by buying more and more into a death spiral.
    14 Mar, 06:03 PM Reply Like
  • Jake2992
    , contributor
    Comments (831) | Send Message
     
    good way to get killed on yield roll decay and levered etf decay. Its better to short these products.
    18 Mar, 07:23 PM Reply Like
  • Lefty6x6
    , contributor
    Comments (48) | Send Message
     
    RE is right (which is quite the recognizable trend I might add...) -- destabilization and bloodshed, while initially a 'shock', are not good for the system.

     

    Gold, as we know, is a very emotional thing, ergo, also a very emotional trade / investment. It's historical that gold is thought to be a 'safe haven', and all that, making it the 'place' people go when the rest of the market is in a presumed disarray.

     

    MINERS, on the other hand, which we are talking about - and it never ceases to amaze me that people can't separate the MINERS from the physical yellow rock - are after all COMPANIES. those companies and businesses have to manage costs, labor, delivery, execution, etc. to even be able to get the yellow rock out of the ground.

     

    The HEALTH of (and subsequently the profitability) of the MINERS is affected by a lot more than just the rise and fall in the price / presumed value of the yellow rock that they produce.

     

    investing / trading the MINERS is not the same as investing / trading / owning the yellow rock.

     

    The sooner people can understand that concept, the more successful their trading in one or both (miners and yellow rock) they are likely to become.
    16 Mar, 10:23 AM Reply Like
  • John Tiwari
    , contributor
    Comments (9) | Send Message
     
    Excellent article with Ukraine in the mix.

     

    Just wondering at what stage would one start the 1/3, 1/3 and 1/3 strategy - is it at the falling knife stage (as in Dust now), or cross of a moving average, MACD's etc.

     

    If one buys 1/3 DUST now at $16.00, (falling knife), would one want to risk a 1/3 buying NUGT at this high price around $59.00 and GDX at major resistance at $28.00 ?

     

    Would this strategy work for UGAZ and DGAZ as well ?

     

    Thanks for your response.
    16 Mar, 11:46 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (481) | Send Message
     
    Author’s reply » Excellent question John! A good example (and one I should have implemented this week and will definitely do in the future) was when GDX was bouncing up against the $27 resistance area for a few weeks. Every time it approached $27, buying DUST was the trade.

     

    However, this week it broke on through and traded above $27. That would be the time to immediately buy NUGT at around the $52.50 area, and ride it up to Friday's opening at $59.27 where profits should have been taken as GDX opened up against the $28 resistance level. One could have at that moment bot some DUST at $16.20 and averaged down the DUST $18+ shares. Then on the rally to $17.27, taken a $1 profit on the DUST trading shares bought at $16.20 and hold the original DUST over the weekend to see if GDX moves up anymore. If GDX starts taking out $28 resistance on Monday, I would say to buy NUGT again, maybe $60 on a stop, to protect the DUST shares from a further drop. If one gets stopped into the NUGT shares and then NUGT falls, you should be equally balanced between DUST & NUGT so no big deal. Find resistance levels to take profits on the winning side, and also use your remaining 1/3 funds to add to which side is winning (either DUST or NUGT).

     

    This would work well with DGAZ & UGAZ, or any other triple leveraged ETF pair.
    16 Mar, 01:29 PM Reply Like
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