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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
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  • After Another Tumultuous Week, Things Are Looking Up For Gold & Mining ETFs (GDX & NUGT)

    (click to enlarge)

    With the shockingly weak employment report on Friday, January 10, 2014, the gold mining ETF (GDX) reversed the strong bear Marubozu red candle of Thursday, by gapping up above any price traded on Thursday, and scoring a bullish long white candle, as shown on the above daily GDX chart. This two day Japanese candle combination is called a kicker signal. If you check out many day trading sites like the Candlestick Trading Forum here, they will tell you the kicker signal is the strongest candlestick signal of all. But in truth, this rare signal only reliably predicts market direction 53% of the time, as reported by leading expert Thomas Bulkowski, author of Encyclopedia of Candlestick Charts, click here. Thus, despite Friday's big reversal in sentiment towards gold and the miners, the report's effect on the overall gold trend will be quite short. But that is all right, because something else occurred with Friday's big bullish reversal.

    Gold And The Miner's Close Up Three Weeks In A Row

    (click to enlarge)

    Although I was expecting higher prices for this past week, click here, it was a challenging and frustrating week until Friday's big turnaround rally. The late Thursday selloff was especially disheartening for gold mining bulls, in light of the fact gold closed up for the day.

    In the above weekly GDX chart going back 2 years, you can see that closing up three weeks in a row is a rare event. When it occurred in April 2013, the following week we rolled over making a long red Marubozu candle to new lows. However, we snapped back the following 2 weeks to rally up to recent highs.

    The next example is July 2013, when the market had three white weekly candles with the third candle gapping up strongly. Due to that gap, it was almost inevitable that we retraced the following week, but then rallied strongly the next 3 weeks.

    What we have done for the past three weeks is form two white candles, followed by a hanging man candle this past week. The candle looks like a cross with a small real body near the top. If this pattern came after a selloff, it would be called a bullish hammer pattern, but now that we are in a short-term uptrend, the pattern creates a bearish hanging man pattern. On an intraday chart a hanging man pattern is typically bearish, but on daily and especially weekly charts, it has virtually no predictive power. Thus, it is not a concern. In fact, if you look back to July 2012 on the weekly chart you will see where GDX bottomed from just under $40 and rallied to just over $54, in 9 weeks. If you look closely you will notice that there were three hanging man patterns along the way, and they did not hurt the rally at all. I am hopeful that we just might now be three weeks into a similar 9 week rally phase. And even though GDX rarely goes up for three straight weeks, let alone four, I am quite hopeful that this coming week will continue the slow upward trajectory. The fact that we retraced this past week until Friday, there is no reason to return to the downside next week. We have already covered the lower price levels and are now ready to march higher.

    The Gold Chart Is Looking Much More Constructive

    (click to enlarge)

    Closing above $1245 in February gold is quite constructive. Also, trading above $1248 at the end of the trading session on Friday is quite encouraging. The next hurdle is overcoming resistance at $1255 and finally $1268. Despite the onslaught of one bearish gold article after another, explaining why gold is going nowhere but lower, the charts are telling a completely different story. The charts show the recent downtrend has been decisively broken and prices below $1200 have been soundly rejected. All that is left is for a trade in gold above $1268 and a march toward $1300 should immediately follow, thanks to short-covering. The buying due to commodity index rebalancing will be completed by midweek, but hopefully by then the upward momentum is strong enough to continue the rally to higher levels.

    I Remain Very Committed To The Bullish Case For Miners

    In the article I posted last weekend, I explained how I had reduced my triple leveraged gold mining ETF (NUGT) loss from $17 at the bottom, to $9 per share. By partially to fully liquidating my shares this past week on strength, and buying back lower on dips, I was able to further reduce my loss by $3, to just $6 per share. Since NUGT only rallied 55 cents this past week, from $30.12 to $30.67, I am very happy to have been able to reduce my loss so substantially without the market moving much to the upside. This has bought me some further room to maneuver. Instead of having to make sure I bought back in on a rally to $32, I can now wait until NUGT rallies to $35, before I have to get long to make the final $6 back to my $41 breakeven price. Although I am long GDX over the weekend, as a strategic move, I have chosen to stay out of NUGT over this weekend to see if gold and the miners can successfully break through resistance. As soon as it is apparent we are moving up, I will be back in NUGT to ride the train to higher levels. Because NUGT is leveraged, one should only trade NUGT when one is confident that the trend is up, and until we bust through the current approaching resistance levels, a further continuation of the uptrend is yet to be confirmed.

    An Elevator Analogy

    Recently, GDX has struggled to overcome resistance at $22.20, and now that we are back at that resistance level, we are hitting our head against the ceiling. Only when we bust through to the next level will $22 switch from resistance to support. The best way to picture this is an elevator analogy. Think of a building with an elevator. Each floor in the building corresponds to a dollar mark in GDX. When GDX bottomed just around $20, we were on the 20th floor and $20 offered good footing and support. But as we moved up the elevator to the 21st floor, we bumped our heads on the ceiling as we reached $22 and could not go higher. Once we finally do break through, then what was resistance will become support, as we will be on the 22nd floor and $22.00 will be solid floor support and the new ceiling will be $23, $24 or higher. Recently there have only been 2 buttons showing up on the elevator, "20" & "21". GDX traders have been stuck to traveling between the 20th and 21st floors. As soon as we get clearance to move higher, the "22" button will appear, and I will push that button and get back in to ride the elevator higher. Until then, I am cautious for GDX as it hit the $22 ceiling, but I remain extremely bullish as soon as $22 is overcome and that price becomes the floor.

    Going forward I expect to only be significantly invested in NUGT about half the time, as I only want to trade this leveraged ETF when the uptrend is assured. I also expect to play the leveraged bearish ETF (DUST) a few times each week to lock in some daytrading profits and to protect myself during some minor downdrafts. My long-term positioning will center around the gold mining ETF GDX, along with NEM, and other gold stocks, as these are not leveraged. If I am correct and we are 3 weeks into a possible 9 week rally phase in the miners, similar to what occurred in July and August 2012, there will be many rallies, followed immediately by retracements, as we move slowly higher. I should be rewarded for taking profits in NUGT whenever resistance is reached or upward momentum fades. I should then be able to buy NUGT back when it dips back down, where I can buy it at a bargain price. I hope to be able to fly high and enjoy the thrilling rides skyward in NUGT, and avoid those terrifying dive bombs back into the ground.

    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 GDX.

    Additional disclosure: I will also be in and out of NUGT & NEM etc.

    Tags: NUGT, GDX, DUST, GLD, NEM, ABX, GG
    Jan 11 12:46 PM | Link | Comment!
  • Leveraged ETFS (NUGT & DUST) Proposed Trading Strategy Rule # 2: The Half-Line

    I recently wrote an article where I proposed a trading rule that might be helpful when trading triple leveraged gold mining ETFs long (NUGT) and short (DUST). If you did not read the article found here, you will want to read it first. The strategy outlined in that article will be called Proposed Rule #1. In this article, we will cover Proposed Rule # 2: The Half-Line.

    If you have been following my articles you will know that I am currently invested in the triple leveraged gold mining ETF going long (NUGT), and started out with a breakeven price of $41. Having fallen back from a high a few cents shy of $50, I thought I was buying value when I got in, but I was wrong. The underlying unleveraged gold mining ETF (GDX) recently made a new five year low just above $20, and the leveraged ETF (NUGT) hit a low of about $24. As we dropped to the lows I was adamant not to take my loss at the bottom, as I was confident there would be a rally that would allow me to sell at a more advantageous price. While trading below $30, I felt it was too dangerous to day trade around my position, as I might sell and the market might rally without me, forcing me to lock in the loss. However, we recently rallied just shy of $32, which allowed me to sell out on strength. The couple days that we topped, I was able to completely liquidate my position at a price equivalent of $32, making back $8 of the $17 loss, nearly half. I then tried day trading by buying NUGT on dips, but keeping my position size initially at 50%. By only owning 50% if we fell back down to the lows, I would only carry half the shares that I had previously, and could add the other 50% at the bottom.

    As we rolled over and began trading back below $30 again, I found myself in a very favorable win/win situation. On dips, I could buy back up to 100% of my original position size in NUGT, and then take profits on half my position on rallies of 30 to 50 cents, and occasionally nearly a $1. I tried to keep a core position of 50% on, in case we kept rallying. Likewise, if we fell and I went ahead and moved to the 100% NUGT position size, I tried very hard not to "hang" the second half of the shares so as not to carry the entire position down to the bottom again. On rallies, I was aware of the fact that taking profits on half or even all of my position was advisable, as long as I bought back in when the NUGT price crossed the $32 mark. Rather than just sit idly by, waiting for NUGT to move back to my $41 breakeven price and eventually hit my $50 target price, I was able to take advantage of daily price swings by scalping in and out of the market. In just over a week, I was able to reduce my breakeven price from $41 down to $37.50, a significant reduction of $3.50. At this rate, I should be able to break even on the trade, within a month of maneuvering, even if NUGT never approaches any of my upward targets.

    I rode through a significant downturn of $41 to $24 before eventually stopping the bleeding at $32. Had I taken action much sooner, I could have kept myself from suffering through a lot of pain and frustration. Thus, my proposed triple ETF trading rule # 2, is that whenever one realizes that the market is moving against them, they should sell out half of their position immediately. So many times I am asked by traders locked into a severe losing position what they should do. The best answer, is to cut the position size in half. The sooner one does this as I illustrated in my above example, the better. By drawing a line in the sand, one limits their loss. The line in the sand is the price where one sells half their position. In my example above, it would have been $32. I call it the "half-line".

    Suppose in my example above, I had woken up to the fact that I was in trouble much sooner, say at $35. At $35 I could have sold out half my position, taking a $6 loss on half my position. The $35 price would become my "half-line". If the market immediately turned higher after I sold, it would not be a problem, as I could just add $6 to my remaining NUGT shares and my breakeven would rise from $41 to $47. If however we continued to fall, I would have freed up cash to day trade up to 50% of my position size. As we moved into the low $30s, I could even have sold out my entire position, as long as I got back in before the $35 half-line was reached. I could have saved myself from most, if not all of the misery of watching the $30 support give way and dropping down to the $24 low. For about 3 weeks we traded up and down from the $24 low but never able to retake the $30 mark. I could have been taking advantage of those price swings by scalping using the freed up shares. At the bottom area, I could have gotten bought back in 100% lets say at $25. Then when we rallied back towards $32, I could have liquidated my entire position and easily broke even. Also, the shares that were liquidated at $35, would buy a lot more shares at $25. This also helps lower the breakeven price even further.

    There is one other point that I want to cover. I remember when the $30 price was breached the first time, NUGT appeared to have major support between $29.50 to $30. Had $35 been my half-line, I would have surely gotten back in 100% around $30 with the hopes that was the bottom. However, I would have been wrong. As we broke down further, suppose at $28 I would have realized that I was wrong. I could have again sold out half my position, creating a second half-line of $28. This would have freed up cash to buy near the lows and scalp for profits to reduce my breakeven price. With a $28 second half-line, as we bottomed at $24 for the final time, I would have had plenty of room to realize we were going up and get fully invested below $28 to ride the rally back up towards $32.

    As one can see, you can be far from perfect in your price predictions. And you can be far from perfect in your trade executions. And you still can recover from your mistakes, and be quite profitable. The secret is to act decisively when you realize you are wrong. The sooner you wake up, the better. I am a very stubborn person apparently, and it helps me hold through a bottom, to sell out at a much higher price. However, that stubbornness works against me if I fail to admit I am wrong early on, and suffer through an unnecessary loss situation like I am currently dealing with. I never like to "throw in the towel" on a trade. However, with the "half-line" method, one is not giving up at all. Instead, one is temporarily cutting the risk exposure in half, to allow time for the market to stabilize and bottom, at which time the full position is re-instated at a much lower price.

    Disclosure: I am long NUGT.

    Additional disclosure: Also long GDX & NEM

    Tags: GLD, NUGT, GDX, NEM, ABX, GG
    Jan 10 7:06 AM | Link | Comment!
  • Petrobras (PBR) Selling Is Getting Overdone; Should Bottom In Next Couple Weeks

    (click to enlarge)

    The above weekly chart of Brazilian oil giant Petrobras (PBR), shows that we are now quickly approaching the multiyear low of $12.03, set on July 5, 2013. Although this is a classic chart of a falling knife stock that pundits will say you should never try to catch unless you want to get bloody, I say that it shows a lot of promise as a very "catchable" falling knife stock that should be quite rewarding to the brave souls who venture to buy it using patience, skill, and sound money management techniques.

    I successfully traded PBR in 2013 and plan to do so again now. I last wrote about PBR on May 7, 2013, click here, where I explain how I was exercised on PBR $16 strike puts which left me effectively long in late February 2013 at $15.65. We bottomed a couple weeks later at $14.24 and I added some additional shares to get my breakeven about $15.00. The next week we zoomed to a high of $17.85 and I was out. In the March 7, 2013 article I said we should hit a high of $19.50. You would have to hold through a low of $15.13 but on May 6, 2013, my target was met when PBR topped at $19.65.

    From that high we fell all the way down in 8 weeks to the $12.03 bottom before eventually hitting $17.97 in November 2013. From that high we have now fallen for 7 weeks and I finally purchased a few shares today with an average price of $12.70.

    Why Would Any Sane Person Want To Own This Company?

    If you check out Seeking Alpha, you can read a couple bullish articles posted recently and a couple bearish. Bottom line, all the negatives are almost completely factored into the stock. I don't know what the eventual outcome will be on the fundamental side, but I know with their major reserves, and adequate financing to cover their debt, they are not going bankrupt anytime soon. Based on my calculations, PBR is probably a couple weeks away from a major bottom again and I don't plan on staying in long enough for any new bad news on the stock, to hurt me. I will very cautiously scale trade in, buying a little every 25 cents the stock drops from here.

    Everything that I need to know about PBR is found in the above weekly chart. On October 3, 2011, PBR bottomed at $20.44, but would top out 18 weeks later at $32.10. If one bought PBR when it retested the low, the support broke and they could keep buying down to the June 25, 2012 low of $17.08. When PBR topped 11 weeks later at $24.55, it let the falling knife catchers from the last two bottoms, ($20.44 and $17.08) make money.

    The next time the $17.08 bottom was tested, support held at $17.63 and 3 weeks later PBR topped at $20.41. On the retest of support, in February 2013, the support failed to hold and we stopped falling at $14.24. Anyone who bought though at the $17.63 support and again at the $14.24 support, were redeemed when we rallied to $19.65 in May. Again, PBR managed to put in a rally to cover the last two bottoms. It did not make it to $20.41, which would have covered buyers at the last 3 bottoms.

    After the $19.65 May 2013 high, if one had purchased PBR at the $14.24 low which did not hold, they could buy more down to the $12.03 bottom in early July 2013. In 3 weeks PBR came back to $14.76, letting the bottom pickers of the last two bottoms ($14.24 and $12.03) get out at a profit. But in October and November 2013, PBR rallied on up to $17.94 & $17.97, letting the bottom picker of three bottoms ago ($17.63) make a profit. The previous two rallies from lows only made the last two bottom pickers whole. This time, 3 bottoms were covered.

    What this tells me is that if I buy on the retest of the $12.03 low, it the support holds, I will ride PBR back to the $14 to $15 area and be very happy. But if the bottom falls out, the next low should be no worse than $10 or so. I should then be able to buy down to that $10 low, and then expect a rally high enough to cover the last two bottoms and most likely three. The last two bottoms will be $10 and $12.03. If we cover three bottoms back, then we get a rally above $14.24. Again, if PBR breaks the $12.03 low, the ultimate bottom should come in the next 2-4 weeks. From that low, one can expect a rally to at least above $12.03 and most likely $14.24, based on past experience.

    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 PBR.

    Tags: PBR
    Jan 08 10:31 PM | Link | 2 Comments
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