SPDR Gold Trust (ETF) (GLD) has been on a tear of late, rising nearly 21.5% year to date. Yet Direxion Shares Exchange Traded Fund Trust (NUGT), which attempts to capture three times the daily move in the NYSE Arca gold miners index, has simply demolished the move in GLD, rising an astounding 365% so far this year.
Given this type of parabolic move, combined with some major technical resistance and a reversal day yesterday, I look for NUGT to have a short-term pullback over the coming weeks.
The most recent up leg in NUGT saw a 56% rise in five trading days, similar in magnitude to the previous spike that saw a 61% gain over a six-day period. That previous move ended with a pullback and a period of consolidation and I look for a similar pattern to ensue now.
NUGT also had a reversal day yesterday, with shares making a new recent high before falling to close lower on the day. This type of price pattern many times signals a short-term exhaustion to the rally, especially following such a dramatic move higher.
NUGT, being levered to three times to the daily price move of the ARCA gold miners index, and gold are obviously correlated. So any analysis of NUGT needs to include a look at gold — in this instance, gold futures.
As seen in the chart, gold futures are at a key resistance level at $1,300, along with being overbought on a 9-period RSI basis. The previous times gold futures were this overbought signaled short-term tops in the price of gold.
Conversely, any analysis of gold prices has to take include the U.S dollar, since moves in the dollar are many times the driver behind the price of gold in U.S. terms.
The U.S. dollar has broken support at the critical $93.25 level, although it is deeply oversold. Previous levels when the dollar was this oversold led to short-term bounces, so I expect the dollar to retest the $93.25 level at least once. This would be a decided negative for short-term gold prices.
Examining the NYSE Arca Gold Miners Index shows that the top three stocks comprise roughly 25% of the overall index.
Looking at the top holding, Barrick Gold Corporation (USA) (ABX), one can see the recent dramatic outperformance of ABX to GLD. I look for this to revert back, with ABX and gold stocks generally underperforming over the next few weeks,
While long-term gold and gold stocks may continue to ascend to higher levels given the unabated money printing going on worldwide, short term I expect the recent fervor to encounter some trouble.
To position for a pullback, I favor using a put diagonal trade, especially given the enormous implied volatility levels inherent in a levered product like NUGT.
Specifically, I would look to buy the NUGT June $105 puts (expiring June 17) and sell the NUGT May $100 puts (expiring May 20) for a $9.15 net debit. The trade is 4 deltas short at inception and has a maximum gain if NUGT closes near the $100 level on May expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.