Investors fled to the safety of gold last Wednesday, sending the yellow metal to a two-month high. But it wasn’t just the commodity that scored inflows; gold equities like Newmont Mining (NYSE:NEM) stock also felt the love.
Of course, miners have a history of moving in lock-step with metals, so the bump shouldn’t be that surprising.
The sudden strength is well-deserved on both fronts and should bring opportunity to those willing to shop NEM stock and other related plays.
Precious metals have a long history of calling to stock investors during times of turmoil. Gold’s stability isn’t that popular when stocks are flying to the moon. There are more significant gains and more excitement to be had elsewhere.
But safe havens like gold suddenly seem sexy when the flip switches and equities come underfire.
NEM Stock Chart
Last week’s dash for Newmont Mining wasn’t some small-fry affair. Institutions were scooping up shares in a big way. Nearly 16 million of them changed hands on Wednesday which is about triple the average. We saw a similar surge in the Gold Miners ETF (NYSEARCA:GDX) and the Gold Shares ETF (NSYEARCA:GLD).
Recall the importance of institutional accumulation. Due to their deep pockets, these market participants tend to buy assets incrementally over time. So, if they’re starting to warm toward NEM stock, they will likely continue supporting the stock. That is, they will buy into weakness and perhaps pounce on breakouts.
But the bull case goes beyond the volume groundswell. Newmont’s price chart boasts other bullish signals too.
First, the stock just completed a lengthy rounded bottom by blasting through the 200-day moving average and resistance at $62. Second, NEM stock bottomed before the rest of the gold mining industry and has risen further. In other words, it’s outperforming not just the broader stock market but its industry. Third, the 20-day and 50-day moving averages are now trekking higher to confirm a clean uptrend is in place.
Two price levels jump out at me in searching for the next upside targets. Both are open gaps from last June: $68 and $72.50. With prices now hovering below $64, that leaves enough upside potential to make bull trades tempting.
Gold Miners Break Out
NEM is getting a boost by a broader move into gold-related plays. Consider the chart of GDX. Last Wednesday, the fund saw volume swell north of 52 million shares, marking the most-active session in four months.
More importantly, prices gained 7.2%, finally popping through the 50-day moving average and horizontal resistance. Previously, this had been the graveyard where rallies went to die. This should give buyers that much more confidence to shop the current dip.
Two Ways to Play
As always, options traders have two primary paths to follow here. The first offers more profit potential but lower odds of success. It includes strategies like long calls and call spreads. The second route provides a higher probability of profit but a lower payout. Think of trades like covered calls, naked puts, and short put spreads. Here’s an example of each.
Bull Call Spread: Buy the March $62.50/$67.50 bull call for $1.60.
You’re risking $1.60 to make $3.40 if NEM stock is above $67.50 at expiration.
Bull Put Spread: Sell the February $57.50/$52.50 bull put spread for 65 cents.
You’re risking $4.35 to make 65 cents if the stock stays above $57.50 for the next 25 days.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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