Market News: Will Dow Jones Plunge Pop Gold?

Written by Mike Hammer
By now you know the Dow dropped 800+ points yesterday as investors woke up to the reality of rising interest rates. One might say an 800-point drop in one day is overreacting, and it might be.  Common sense, rational market thinking, and fundamental analysis would say that if rising interest rates were a “problem” then the market should have factored in higher interest rates when they first learned about them, which was, oh, about a year ago.  But in that year the market has gone up-up-up.

If you think we’re trying to convince you that the markets are not fully rational you’re right.  Investor psychology is probably the second biggest unknown in the market, besides the dreaded black swan.  Yesterday’s drop was not a black swan event, however, because the market already knew about interest rates – for some reason, people just decided they had enough and bailed, big time.  (Or was it the black boxes that hit their Sell buttons? We may find out about that in the coming days…)

In any case, what we want to do is try to make money from all this.  And since we trade gold and gold miners, let’s look there.  Gold miners have been in a deep funk lately so that’s probably the place we’ll see the biggest gains.  Here’s the chart of GDX for the past 3 months.

GDX chart, fidelity chart

Source: Fidelity.com


We’ve drawn in the current resistance line at 19.24, and the next level up at 19.81.  The 19.24 level is defined by multiple highs that couldn’t get past that price.  It’s the most simple technical analysis tool.

The next level up takes some explaining, but it’s not too hard.  Technicians call “gaps down” in a chart “falling windows”.  The upper level in a falling window is the bottom of the upper candlestick.  Which is where the 19.81 price comes from.  See, that wasn’t so bad.

The difference in these is only 57 cents.  It’s hard to think of 57 cents as a target you want to chase hard.  What can one do?

Well, one can turn to a leveraged ETF for the gold miners.  Since we were looking at GDX, which is an ETF for senior gold miners, we can look at NUGT, which is a 3x leveraged ETF against GDX.  Note that NUGT is based on GDX, not its own basket of mining stocks.  This makes our job a bit easier as we don’t have so many things to watch.

Here’s the 3-month chart for NUGT, with two levels that correspond to the GDX levels we just found.

NUGT Chart, fidelity chart

Source: Fidelity.com


In this case, the levels are at 14.34 and 16.76, for a range of 2.42.  And that 2.42 is against a lower base price of 14.34, rather than the base for GDX at 19.24.  You can see why short-term traders prefer NUGT over GDX, while longer-term traders who don’t like so much volatility go for GDX.

You might want to keep an eye on NUGT these next few days.  If NUGT does get up through 14.34 and investor concern continues, this might be one of the few bright spots in the market.

Signed,

The Gold Enthusiast

DISCLAIMER: The author is long NUGT and JNUG, and may trade these positions over the next 48 hours.  The author has no position in GDX and has no intent toward that security.  Position sizes in question are not large enough to affect the market.

About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated with a business degree, then worked with Macy's. After Macy's he spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined a well-known financial planning firm as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where he worked first for a small manufacturing consulting company, then a major university. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoken at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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