Gold finally showed some glimmers of stability yesterday following nine straight days of unrelenting selling. While the SPDR Gold Trust (ETF) (NYSEARCA:GLD) closed lower on the day, it did manage to reverse course midday and finish well off the lows. This alone would’ve seemed like the start of a sharp counter-trend rally in gold, but today’s disappointing jobs report cinched it. Now, I want to position aggressively for move higher using the triple levered Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT).
From a technical viewpoint, gold has certainly become way oversold. While that is never a guarantee that it can’t get even more oversold, past instances when GLD had deeply oversold 9-day RSI readings below 20 proved to be significant short-term lows in the price of gold, as seen in the chart. The recent reading of 14.40 is the second lowest over the past two years.
More importantly, GLD finally showed some encouraging price action yesterday. The doji candlestick pattern — with the ETF making a new low only to reverse and finish near the opening price — is many times a reliable indicator of a trend reversal. It also is a good indication that some of the forced liquidation we saw in gold may have finally reached an end with a selling climax.
I think the reversal in gold could be fast and furious, so I want to lever up and position using NUGT, which is a triple levered ETF comprised of the major gold mining stocks.
NUGT also has reached a deeply over sold level and has critical support at the $10.50 level.
It is important to remember that NUGT attempts to capture triple the daily gains of the gold miners and is designed for short-term trading rather than long-term investment. But it is an ideal way to position aggressively and quickly for a bounce in gold and gold mining stocks.
To further lever up, while also defining my risk, I am going to use call options on NUGT as my trade structure. I also am going to use a short-term expiration of only two weeks to add a little more to the aggressive posturing.
How to Trade NUGT From Here
Buy the NUGT Oct $12 calls @ $1.50
These are the traditional monthly expiration options that expire Oct. 21. Maximum risk is limited to the premium paid of $150 per contract.
While I am normally a more conservative trader and usually like to employ lower=risk spread strategies, this is one of those instances where the opportunity to capture outsize gains is too enticing.
As Tom Cruise famously said in Risky Business, sometimes you got to say “what the f*ck” and make your move.
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.