The Other Metals:
I continue to watch the silver, platinum & palladium markets work higher. Gold is the weakest of the metals group but with the strength in the other markets, gold continues to be pulled higher. Briefly on Thursday, July 10, 2014, September Palladium sold off hard, from about $875 to $860, but by the end of end of the day, it had worked its way back to actually close up slightly. That makes 13 straight up days in September Palladium. Silver will encounter some stiff resistance towards $22.00 which is about 50 cents higher than where it is now. Platinum is also dealing with overhead resistance.
Gold Should Top Out In About Another Week
The metal we care most about is gold of course, as that is what the miners mine. Take a look at this daily chart of August Gold from Jim Wychoff at kitco.com:
Gold has been consolidating from $1312 to about $1350 for three weeks. Back in the middle of February 2014 to early March 2014, gold started a similar consolidation that lasted for the same three weeks. However, in the fourth week, August Gold broke above $1350 and surged to $1390 where it topped out. I am now looking for a similar move as a strong possibility, with the surge occurring next week, thinking August Gold could have a similar blow-off top up towards $1388 possibly.
The implications for those playing the triple leveraged ETFs, a further surge higher in gold would cause a further decline in DUST and JDST, to extremely attractive levels to those who are not yet invested on the short side (like myself). But these could be scary weak levels for those who are already heavily invested from higher prices. The teeter/totter approach is still advised! How does that work?
Teeter/Totter Approach Explained:
Suppose I had $60,000 and was bearish the gold miners, I would first divide my funds up in at least 2 traunches of $30,000 each if I was very agile and was able to watch the markets very closely. If not, then I would do 3 trauches of $20,000 each. One only trades one traunch at a time to avoid going bust on an extreme drawdown. Setting up traunches is not an elective, it is required!
Using 2 traunches of $30,000 each, I would start with the first $30,000. Since I was bearish, I would buy $10,000 of DUST. At current prices in the $15s, I could get over 600 shares. I might buy 200 shares at a time, adding more on dips. However, once I had $10,000 invested, I would not add any more DUST.
Then we start the teeter/totter. If the DUST price is moving up (miners getting weaker), that means I am happily making money on my DUST and watching NUGT move to cheaper prices. I will then look for opportunities to invest my next $10,000 in NUGT to lock in my DUST profits, when NUGT falls to support and gives a short-term buy signal. I then daytrade NUGT by taking profits when NUGT rallies. Once I get $10,000 added to NUGT, then I will take my remaining $10,000 and add it to the side that is making money.
But suppose I bought DUST too soon and am losing money. Initially I bought 200 shares of DUST, and it fell so I added 200 more shares to average down. I then bought another 200 shares at even lower prices, but with 600 shares, my $10,000 is spent and DUST continues to fall. I may kick myself and say, why did I buy so close together and make a note to space it out a bit more next time?! The very second that I start losing on the last 200 shares I can buy in DUST, I immediately buy some NUGT. And I buy more on any further NUGT strength (DUST weakness). Soon I will have $10,000 going short in DUST, and $10,000 going long in NUGT. At that point, I use the remaining $10,000 to daytrade on the side of the trade that is winning for the day, and try to get back even and hopefully ahead. With this method, one is never more than $10,000 committed in one direction, using an account of $60,000. Being triple leveraged, 1/6th of the account ($10,000 net long or short) means no more than half of my account is picking a direction at any time, either up or down. I am trading leveraged ETFs but my overall account is never leveraged.
If you buy DUST and it keeps falling and you end up equally invested in NUGT, you might think at that point, you are just spinning your wheels and wasting your time. Not true. One side will be making money and one side will be losing. Take profits on the winning side against resistance, and then buy back on support. The winning side profits will lower the price you will need to achieve to breakeven on the losing shares. If you are balanced $10,000 shares in DUST and $10,000 shares in NUGT, you can sometimes decide not to add to the winning side, but to the losing side, if you believe DUST shares are extremely cheap and offer the best risk/reward value. In those cases, one can add to the losing side and then take profits at breakeven. Suppose DUST is losing and once balanced with NUGT, you decide to add more DUST on extreme DUST weakness. That is fine since you are now only $10,000 net long DUST. Sometimes DUST will rally but not all the way back to breakeven. Just take the bottom profitable shares off and cash those in at a profit, putting you even again with $10,000 of high priced losing shares of DUST, and $10,000 in NUGT. You can add to DUST again using the $10,000 just freed up, or buy NUGT if the miners are showing strength. That extra $10,000 to assist can either be added to the winning side (side with the profits) or to the losing side if that is showing the most future profit potential.
Using the teeter/totter method, I have developed many advanced trading strategies. One of my favorites is "The Reversal". In this strategy, I would buy DUST until $10,000 is invested. Then suppose the miners are showing strength today, and are breaking out, causing DUST to break down below support. The moment I see this happening, I would immediately put $20,000 in NUGT, which means I have now reversed from going short the miners to going long. As NUGT surges higher, I sell either $10,000 or the entire $20,000 NUGT position, cashing out when resistance is found. I then buy NUGT back on dips during the day. If DUST recovers some off the lows, I will sometimes not buy NUGT back and try to get DUST to rally and NUGT to fall. The moment that NUGT comes back to life and DUST starts to dive, I am back in with either $10,000 NUGT to even up the trade, or $20,000 in NUGT to be temporarily on the bull side. It is surprising how many times you can make money on NUGT and DUST on the very same day, buying each when they are weak, and selling out on strength.
A variation of "The Reversal" is "The Reversal To Infinity". In this trade, if I started with $10,000 in DUST, I can then buy $20,000 of NUGT, switching me to long miners, then add $20,000 to DUST making me $10,000 net short. You can keep adding more shares until your entire $60,000 is used or add more funds if available. You can trade 100% of your account because you are never more than $10,000 balanced one way.
Often for part or most of the day, a definable range can be identified where DUST and NUGT swing back and forth in a tight range. That is when I do "The Range" strategy. You can buy either DUST or NUGT at support, and as soon as NUGT or DUST moves up 2.5 to 5%, and/or the upward momentum wanes, you can buy the opposite side to lock in profits. Then you can take off each winning side on profits and switch back and forth being long one and then the other, and sometimes both at the same time.
Buying the opposite side is also often advised when holding overnight. This way you do not suffer if the market gaps up or down overnight, against your position.
I could go on and on, but I don't want to confuse you any more than I already have. The secret to a winning trading strategy is keeping the losses small and letting the winners run. It is tough to immediately take a loss on a position. But buying the opposite ETF side is just a "time-out". You keep it on when you don't know what is going on, or have no idea what to expect in the next hour or the next day.
I will end with a final example. Suppose I was bullish the miners and long $10,000 in NUGT and NUGT rallies nicely. However, late in the day NUGT falls back till I am hardly making anything. I might put $10,000 in DUST overnight to protect my position. Then the next day miners are stronger and I am making on NUGT but now have a small loss on DUST. I try to never take off the losing side so instead of dumping DUST at a loss, I will just add more NUGT (adding to the winner) and ride it up. Then when NUGT stops rallying, I may take NUGT completely off, and then add to DUST to average down, and on a correction, I dump out of DUST at breakeven. This is one exception, where I might have $20,000 in DUST going one direction. I already took profits on $20,000 invested in NUGT, and that buys me the privilege to add to DUST at a cheap price. However, if the 2nd buy in DUST starts going bad, I will quickly dump it or add more NUGT to cancel out. I can risk part of the NUGT profits I just made but don't want to lose all the profits by adding extra DUST shares.
I have shown that you have rules which you follow. However, you can be flexible and violate or change the rules in certain special circumstances. Every successful trader that I have known, followed preset rules, having a game plan. They also violated those rules to take advantage of special circumstances, if the results are profitable. When starting out, set up rules and follow them until you know them well. It is like driving. You have to know the rules of the road. However, with years of experience, you can learn lots of short-cuts, and can even get away with making illegal u-turns when it gets you heading the right direction the quickest and there are no hazards in the way. There are no trading police, insert smiley face.
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.