The gold stock comeback is one of the top themes of 2016 thus far. It’s a resurrection years in the making. And while the basket of golden beauties is off to a rousing start, much work remains before gold stocks ever return to their former glory.
While it would be glorious if the stock fairy magically restored the Market Vectors Gold Miners ETF (GDX) back to its former heights in the $65 region, such a fantasy exists only in the dreams of gold bugs.
The reality is gold stock have a mountain of overhead resistance to muddle through in the months and years ahead, virtually guaranteeing their northbound ascent to be one filled with numerous setbacks and false starts.
With GDX up 43% year-to-date in a straight line, don’t be surprised if the sector cools off in the short run. Here are the three gold stocks ready to cool, and more importantly, how to profit.
3 Gold Stocks Ready to Cool: Barrick Gold Corporation (USA) (ABX)
ABX is the top holding of the gold miners ETF, weighing in at 8% of the entire fund. Since doubling in value from $7 to $14, the rousing ascent in ABX has lost steam. Little ground has been gained in the past three weeks.
But even the most ardent bulls shouldn’t be surprised by its slowdown. Doubling in value every two months is the epitome of unsustainable. I suppose on the bright side ABX has done a commendable job of holding onto its gains despite persistent profit-taking. Nonetheless, if your inner contrarian is growling for some attention, short-term bearish plays on ABX with a tight stop may not be a bad way to go.
Buy the May $14 put for $1.40. Bail if ABX breaks above its recent high of $14.80.
3 Gold Stocks Ready to Cool: Newmont Mining Corp (NEM)
The second largest holding for GDX is Newmont Mining (NEM). Although NEM hasn’t yet doubled in value this year, it’s scraped together one heck of a rally. Like its predecessor, Newmont Mining has already begun to cool in recent weeks.
What’s particularly interesting about the stock’s current perch is the significant resistance level looming overhead. The $27.50 zone has kept a lid on NEM for a couple years. The last two attempts at breaching the ceiling were rejected with prejudice, causing Newmont to eventually descend to new lows.
If the bears want to halt NEM’s advance, now is as logical a time as any. It also presents a decent low-risk entry for contrarians looking to score on some giveback in gold stocks.
Buy the May $27 put for $2.35. Exit swiftly if NEM breaks decisively above $27.50.
3 Gold Stocks Ready to Cool: Goldcorp Inc. (USA) (GG)
Goldcorp (GG) rounds out our trio with yet another bearish opportunity. Its budding recovery has driven the stock back above its declining 200-day moving average for the first time in over a year. And while it now sits in a solid uptrend, the momentum is waning.
Despite notching a higher swing high on its current advance, the underlying strength is slowing as manifested by the momentum divergence in the RSI indicator.
If you think greedy gold bugs are about to get their comeuppance, long puts may not be a bad idea here.
Buy the July $17 put for $2.35.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.