Embrace the Leverage in NUGT to Go for the Gold

Gold was a notable winner over the past week but the pop in the yellow metal paled in comparison to the rip in gold mining stocks. The popular exchange-traded fund Market Vectors Gold Miners ETF (GDX) is up 14% in the past five days alone. In contrast, SPDR Gold Shares (GLD) — the de facto gold proxy for stock traders — was up a mere 2.4% over the same time frame.

Direxion Shares Exchange Traded Fund Trust - Embrace the Leverage in NUGT to Go For The Gold

You know what’s really eye-popping though? The 45% melt-up in the Direxion Daily Gold Miners Index Bull 3x Shares ETF (NUGT). It’s the leveraged ETF for gold mining stocks.

Take the daily move in GDX times three and that’s essentially what you’re looking at with the price moves in NUGT. As you might imagine, it’s a playground for volatility junkies.

A Great Market for Gold

The fact that gold stocks are outperforming gold prices by such a wide margin is a good thing. Gold bulls are venturing into higher-beta pastures in search of bigger returns. And that means the risk tolerance dial for gold traders is being turned up.

If these alpha chasers stick around, expect the newfound uptrend in NUGT — and GDX for that matter — to persist.

Click to Enlarge
Source: OptionsAnalytix

And speaking of the trend, it’s a beaut. NUGT is perched above all major moving averages and just broke out of a sideways consolidation pattern. While I wouldn’t advocate chasing here — it’s tough to buy after a 55% launch — watching for lower-risk entries is a no-brainer.

Any time a stock is overbought like NUGT, it typically corrects in one of two ways — through price or time. A price correction occurs when sellers take control, pushing prices lower amid a wave of profit taking. That right there presents a buy the dip opportunity. A time correction simply means the stock meanders sideways for a spell while the overbought conditions are worked off.

With NUGT, Stick to a Stock Play

Time will tell which one transpires in gold mining stocks, but if a pullback does materialize, watch the $70 zone to provide support.

So what’s the trade? While I’d love to throw out an options play, the liquidity in NUGT options is atrocious. If you have your heart set on NUGT, then buying shares outright is the way to go. Wait for a pullback in the coming days and then scoop up shares.

Or, if the stock merely bases sideways, look to buy a breakout above near-term resistance at $85.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/embrace-leverage-nugt-gold/.

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