GDX / NUGT Follow Up

Yesterday I posted GDX / NUGT Update , the gist of which was that GDX / NUGT look VERY much like they are NOT going to see a deeper pullback, but rather move to the next leg of a trend higher which is something I'm VERY interested in. The reasoning for the theory is really more based on the revised , "expected" GLD downside, basing target which was significantly lower. I will put out a post today showing what I believe to be a higher basing area for GLD which is part of a nearly year long base and that's important to GDX / NUGT because the correlation to gold is so tight which you can see in yesterday's post, GDX / NUGT Update.

I did not take a new position in GDX or NUGT yesterday, I think there's still some time, but I'm not opposed to taking a position in the area as long as the trade is at least a swing trade or longer, if it's an options trade, then I think we have to be very specific about the entry, otherwise I think a position could be phased in to as slight pullbacks occur. One of the main reasons I did not open a new position was the "noise" factor in the market right now, essentially making the asset very choppy (at a gain one day, the next at a loss, the next at a gain, etc.).

Yesterday's post explains my thoughts on GDX and NUGT going forward so I'm not going to recap that as you can just click the link and check out the update, but I do think understanding where GLD is and why I'm revising the base target higher are essential to understanding the bullish position of GDX/NUGT in this area... I'll get that GLD revision post out today.

I think we have a good chance to enter GDX or the 3x leveraged version, NUGT very soon, let me show you why...

*Actually now that I've captured the charts, I will give a little longer term background just because there are some great examples of our concepts, but don't miss yesterday's post for a more in depth look.

GDX (Gold Miners)

 This is a 3-day chart of GDX, I always like to start with the longer charts such as 3 day or even weekly, knowing where you are in a cycle or in multiple cycles in different timeframes allows you to get a good idea of where you are going and how close you are to that. Most people fail to look at the big picture and miss VERY important information.

For example, we have a PRIMARY TREND/CYCLE above, it's a full bull market, a top, a full bear market and the start of a new bull market. Note the stage 1 base around March of 2009, this is essentially the same time the market at large based and found a bottom as the F_E_D was adding treasury purchases to QE1 which started toward the end of 2008 with MBS purchases only, the addition of treasury purchases did the market a lot of good and created a bottom that the PPT aggressively defended, but that's another story.

After stage 1 base we see stage 2 Mark Up and note the advancing volume with advancing price, this is what a healthy uptrend "should" look like, most assets and averages did not look like this during this period because there was no real demand other than what as created by the F_E_D (which was substantial, but not organic, the F_E_D was manipulating the market through POMO).

Stage 3 should be clear and the break below support or what would be called a "neckline" if stage 3 were a H&S top, was the break to  stage 4 / Decline, but BEFORE that could happen (as we just dealt with), there was a Volatility Shake-Out (VTSO) which shook out all of the new shorts that chased price lower as they saw the break of support to be price confirmation, they are predictable and Wall St. ran them out of their positions with a simple Volatility Shake-Out back above former support (which became resistance ) as their stops for short positions would have been just at or above the newly formed resistance (former support at the neckline). THIS IS THE 3RD AND LAST AREA I'LL SHORT A H&S TOP OR EVEN A TOP LIKE THIS BECAUSE THE TRADE COMES TO YOU, OFFERS A MUCH BETTER ENTRY, LOWER RISK AND IS PREDICTABLE.

After the VTSO we resume the stage 4 decline and in to a new cycle which is how it usually works, we start over again at a stage 1 base.

 This daily chart shows stage 4 / Decline and the transition (remember volatility always picks up between transitions of stages, for example price gets parabolic on the upside when stage 2 Mark-Up is ending and we move to stage 3 /Top, stage 4 typically ends with "Capitulation", a massive selling event in which all hands that are going to sell throw in the towel at the same time, there's a gap (or several) and volume increases.

We typically see a move lower after capitulation, many people think after capitulation the market moves back up immediately, it doesn't, it tends to drift lower in to a new stage 1 base as we see above.

 This is a closer look at capitulation and the increased volume, then the drift lower in to stage 1. We also see a head fake move below the large base's support area and our current near term base is sitting right on the long term support trendline right now.

 On a 60 min chart the near term "W" base or double bottom-like price pattern even sees a small head fake move below support before making a move higher. "1a" and "1b" are the two base or accumulation areas of this smaller base that you can see above on the daily chart.

As far as a pullback allowing us a nice entry in to GDX or NUGT long (maybe some calls) we see some 5 min distribution at the highs of the 23rd and today's gap up has no real confirmation suggesting that we are not quite ready for a move higher without a little lateral trend work being done first.

This is the noise part I wanted to avoid as it is at best dead money, at worst it's open market risk and opportunity cost as the funds could be used in an asset that is in a better position to make money NOW.

 Just for some confirmation, this is the 3 min chart of NUGT, essentially 3x long GDX and again you see no confirmation of the gap up today even though 3C has shown us near perfect trend confirmation so why shouldn't we trust this confirmed signal?

 GDX 2 min shows the same, a relative negative divergence to turn GDX down, this is a weak divergence, but I don't think they are trying to distribute, just to steer GDX down lower tom a better accumulation zone, CHEAPER!  The leading negative I think is just non-confirmation of a gap and price should catch down to 3C and that's where I suspect we will see accumulation and that's our cue to start phasing in to or just opening a long.

As I said yesterday and today, if you are looking at this from a longer trade perspective, a swing trade or longer, I wouldn't mind phasing in to a long with a partial position here, leave room in the risk management to add at lower prices and get a decent average price, but this has to be part of your risk management plan BEFORE you enter the trade, NOT DOLLAR COST AVERAGING TO GET OUT OF A BAD TRADE THAT HAS GONE AGAINST YOU OR WHAT IS KNOWN AS, "THROWING GOOD MONEY AFTER BAD".

The 1 min NUGT chart is kind of in confirmation after a recent negative divegrence, but again this is only a 1 min chart so I think it is "price steering", not distribution.

Thus GDX and NUGT should both offer interesting long entries very soon.

I'll get the GLD post out soon as it changes a lot as far as base expectations and GDX/GLD have a VERY TIGHT correlation with each other.