Buying Opportunity Coming In NUGT

Summary

  • We believe the precious metals sector is dropping into a daily cycle low.
  • Short-term trades suit leveraged ETFs such as NUGT.
  • We analyze where the bottom may eventually occur.
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Direxion Daily Gold Miners Index Bull 3X Shares (NYSEARCA:NUGT) is a leveraged ETF (300%) on a weighted index of some of the most popular gold and silver mining companies. This vehicle is best used for short-term plays and most definitely not long-term holds. In fact, if we look at a weekly chart of NUGT going back to the bear market bottom in commodities at the start of 2016, we can see that the present share price of just over $30 a share is nowhere head the 2016 highs in NUGT of well over $100 a share.

Alternatively, if we look at the Gold Mining ETF (GDX) which basically is the unleveraged form of NUGT, we can see clearly that gold mining companies are trading at very similar prices to that of the highs of 2016.

The reason for the large discrepancy between the two vehicles is due to the 1%+ expense ratio in NUGT as well as how the leveraged ETF is setup. This is where the risk really lies with NUGT as the fund uses options, futures, and also short positions in order to gain the 300% leverage for the respective trader. Obviously, if one is correct on direction, a lot of money can be made in a short period of time. Alternatively, things can go awry quite quickly if one finds himself on the opposite side of the trade.

What should be quite apparent, therefore, from the above charts is that NUGT cannot be held for the long term when one has a bullish stance. The reason being that the use of financial derivatives (such as futures and options) always brings "time" into the element which is the real enemy of the trader who owns the derivatives. Just as a call option loses time-value every day/week it is held, NUGT also loses value over time.

Professional traders use these instruments in the mining sectors either intra-day for scalping purposes, at half-cycle lows or even at daily cycle lows. In fact, we believe the precious metals sector at present is most likely moving down into its first daily cycle low of this broader intermediate cycle. This means we should have a buying opportunity in this sector over the next week to 10 days.

In fact, if we zoom in on the weekly chart of NUGT, we can see that the ETF printed its most recent intermediate cycle lows in September of 2018, in April of last year and also in November of last year. These timeframes also match up with what we see on the GDX chart. Intermediate cycles in the mining complex usually last around 6 to 8 months. Both the RSI indicator as well as the stochastics get oversold which provides the fuel for the next move up.

If we then go to the daily chart of NUGT, we can see that price has already retraced more than 50% of the recent rally. This has resulted in the RSI momentum indicator dropping into oversold conditions. However, the MACD indicator has just crossed over and the slow stochastics also has not yet reached oversold conditions. This may mean that we have further downside here before bottoming.

What we do like, however, on the NUGT chart (which leads us to believe that this down-move will end up being temporary) is the fact the buying volume continues to increase. Volume is an excellent predictive indicator of where the share-price is, ultimately, going, so this trend is definitely an encouraging sign for the bulls.

Therefore, to sum up, although we would never recommend NUGT over a long-term horizon, the ETF has its advantages when the trader is correct on the direction. Of late, the volume has been increasing in the fund as we believe the ETF is currently moving down into its first daily cycle low within this broader intermediate cycle. We will keep an eye on the gold chart as gold primarily leads this sector. In fact, gold is not even close to entering short-term oversold conditions, so we may still have to go lower here in the near term before registering that low we are looking for. Let's see how the weekly charts look at the weekend.

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This article was written by

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My name is Jack Foley and I primarily write and research investment commentary as well as trade the markets. I'm Irish but live in Madrid, Spain with my beautiful wife and 2 children. I believe to be successful at this game, one has to have real passion for the markets and be constantly reading and researching material. From fundamentals analysis to technical analysis, options or futures, income or capital gain, long term trading or day trading, there is something for everyone in the markets depending on one's respective goals. "Starting with the end in mind" is a great mindset to start your investment career with respect to ascertaining exactly what you want to get out of the markets. Write down what you want and how quickly you want it. Therefore depending on the capital you are starting out with, you will then know what levels of risk you need to take. Whatever doubt or query you may have, I'm here to help. Shoot me an email in the contact tab and I'll come back to you as soon as possible

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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