Child’s Play (GDX,XLP,DIA)
It’s fun to be a kid in the summertime, and play all those games.
When we were little, there were a bevy of inventive minds on our street, children who were just as happy to make up their own amusements as play ‘Kick the Can’ or ‘Hide and Go Seek’.
There was Stewie Ferguson, for example, who invented a real doozy of a game called “Smell my Finger”. The Viccari twins, I think, made up “Where’s the Worm?” And both those games, of course, became threateningly exciting when a blindfold was added to the mix.
It was rompus fun for all, summer and winter, too, when the O’Malley dog had puppies and we sat in a circle around the Sedgewick’s chestnut tree playing “What’s Barney Licking?”
How Little Things Change…
Today, the blindfolds are still on while investors carouse with “Run up the Techs” and “Valuation Revulsion”. And while no one seems ready to join in a round of “Pliny the Prudent”, we’ve decided to initiate a bout of that classic game today, regardless of who throws in with us.
We’re not the only ones peddling the commodities story these days.
There’s a growing understanding that we’ve reached a turning point in the price of ‘real’ goods today, and new investment opportunities are emerging for those with their eyes open, even though several sub-sectors have recently taken it on the chin.
The energy complex, for example, led by oil, appears to have entered a corrective phase, though for how long, we can’t say. And the base metals, too, like aluminum, zinc and copper, have also suffered setbacks.
Even gold and silver have been declining.
But that’s all temporary, in our view.
A look at the dollar is instructive.
This is the daily chart for the dollar basket over the last six months. And our take is that after a steep climb over the last three months (in red), we’re now due for a breather.
We base our view on the fact that ‘price’ has reached her long term moving average at 95.5, a line that marks solid overhead resistance (in blue). We would expect a stall at best, a bounce lower at worst, with an outside chance that DXY slices right through that line without taking a breath. After the gains of the last three months, however, we’d put that latter probability at about two or three percent.
We would also add that RSI (in green) has flirted with overbought three times in the last month – at even lower levels than the dollar is currently trading.
All of which inclines us to posit that recent dollar strength is about to abate.
Now look at gold, in many ways a mirror image of the dollar.
The precious metals as a whole have gotten a razorback, hide-kicking of late, falling 6.5% (gold) and 5.5% (silver), with the latter decline occurring in just four trading sessions!
In the case of gold, that’s brought the metal down to strong support at her long term moving average (in blue).
It’s at this stage we would expect a bounce, but how far it might carry over the near term is hard to say.
Let’s look to the weekly chart for some clarity –
Here we see the current bearish action in the context of a much longer up-trend. And most importantly, strong support emerges at precisely this juncture, from a year-long rising trendline (in red), as well as two intermediate term moving averages (137 and 274 DMA).
Our very strong suspicion is that gold retraces higher at this point toward a stubborn, two-year line of resistance at GLD 130 (in blue).
But it’s not gold, per se, that we’re trading this week. Rather, it’s the miners.
Two Steps Back
We have two trades to report before we get to this week’s action, and we start with this –
On October 26th of last year we opened a trade that asked you to buy the XLP June 15th 53 CALL for $2.33 and sell the DIA June 15th 245 CALL for $2.78. Total credit on the deal was $0.45 per pair. The letter was called The Problem With Flying, and to our great chagrin, it crashed.
On May 17th we bought back the DIA CALL for $3.95, but the consumer staples (XLP) never came through.
It expired dud-worthless last week, and we find ourselves with a net loss of $3.50.
Next up was our January 4th effort from a letter called New Year in, Same as the Old, in which we urged selling the GDX February 2nd 24 PUT for $0.78 and the GDX February 2nd 23 CALL for $0.91. Total credit on the trade was $1.69.
On February 8th, after the PUT expired in-the-money, we found ourselves owners of a lot of GDX at $24. We immediately sold the GDX June 15th 22 CALL for $1.38, thereby reducing our cost base for the shares by $3.07 to $20.93.
As of last Friday, the shares were called away, and we exit the affair with a profit of $1.07.
The miners offer a renewed profit opportunity this week, based on the probability of a bounce higher in bullion, and their own, unique technical set-up.
Have a look now at a weekly chart of the VanEck Vectors Gold Miners ETF (NYSE:GDX) for the last three years, a paste-up that offers tremendous hope to the bulls.
- To begin, we have three fan-lines down completed (in red), a strong signal that the selling is complete.
- We have tremendous support for over a year and a half at $21 (blue line), indicating a safe and cheap entry at these levels.
- We see, perhaps most significantly, in the black insert, that the weekly moving averages are unfurling higher, a process that will be complete by week’s end.
- And we see RSI and MACD in 18 month sideways sleep patterns (in green), a signal that a big move is on the verge of occurring.
Our trade for the week is a bet on that break happening in the next three months. And we’re gaming it like this –
Options Trader Elite recommends you consider buying the GDX December 21st 24 CALL for $0.77 and selling the GDX December 21st 21 PUT for $0.80. Total credit on the trade is $0.03.
Many happy returns,