A critical test looms for gold prices, which should determine the fate of the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX). GDX and the yellow metal are tied at the hip, just like conjoined twins. And that makes it imperative to watch one when forecasting the behavior of the other. Read on for why I think this setup in gold miners is a rousing buy.
If there’s one price level that has dominated the discussion surrounding the yellow metal this year, it’s $1,300. For the first seven months of 2017, this threshold was an impenetrable ceiling, one where rallies went to die.
But last month something changed. Buyers saved up enough shekels and gathered sufficient supporters to their cause to finally punch through resistance. As is often the case swift follow through ensued tacking another $60 onto the price of gold.
Since then profit-taking has taken the commodity down few notches, and we’re now facing a retest of $1,300. Gold bugs are clinging to the hope that old resistance does, in fact, become new support. I suspect their faith is well-founded as this is a principle that plays out frequently.
Undoubtedly, spectators who missed the initial breakout trade will be eyeing this dip with interest. If or (more likely) when buyers step up, bullish trades in gold and gold stocks are worth a shot.
Gold Stocks are Ready to Mine
And that brings us back to GDX. The recent bout of profit-taking has ushered gold miners back to their breakout zone. And with rising moving averages across the board (20, 50, 200) I think this pullback is a rousing buy. You can use a stop loss around $23 to jump ship if we’re wrong. And for a target, I suggest $25.50 which is the prior pivot high.
With an implied volatility rank at a lowly 4%, GDX options are relatively cheap which suggests a long call play is worth a shot. Buy the Nov $23 call for $1.50.
Your risk is limited to the initial $1.50 and will be forfeited if the gold stock ETF sits below $23 at expiration. The max reward is unlimited.
As of this writing, Tyler Craig held bearish positions in GDX. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.