Leveraged ETFs/GDX vs. NUGT

 

 

 

 

Trader Scott’s Market Blog

January 10, 2017

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From this post a few days ago there were several comments – biotechs, gold resistance area, etc. One of them was a general answer to questions about using the leveraged ETFs to position for a bull market in PM miners. You can see the whole comment at the post, but here’s a snippet:

I purposely use the leveraged ETFs for short term trading, because it forces me to keep it very short term, but not for position trading. I did a “lesson” about how the leveraged ETFs (derivatives basically) underperform the underlying product – in this case GDXvs. NUGT. (I did audio with it, so the lesson may get posted, we’ll see – just experimenting with some things.) And even in the relatively short term, look how they underperform. Just in the last several weeks, they’re already underperforming. But their volatility is great for short term stuff. But on a bigger picture, my view is unchanged. We did get the good rally out of December which I wanted to see, so that is a bit of a “confirmation”/confidence booster. And the much bigger backups in the individual miners are the position buying entry points, with some selling at the big resistance areas.”

All of the leveraged ETFs, not just the PM ones, have the same problem (especially the 3x ETFs, and even more so when the underlying is also very volatile). The problem is the “decay”. The “beauty” of leverage doesn’t come for free, and that is a big performance hindrance over time. They certainly amplify the moves when it is one direction, but the countertrend moves to the main trend really erode prices over time, and the more volatile the underlying, the more the erosion. And you just have to look at those two chartsof GDX and NUGT only over the past several weeks, and NUGT is already underperforming. The DUST ETF shows this situation so well. The miners were in a bear market from 2011 until January 2016 (for the HUI), yet look at what happened to the inverse (bearish) ETFDUST. So yes, the leveraged ETFs are great for very short term trading, OK for a bit longer than that, but horrible over time. And the miners are volatile enough on their own, so for a longer term view they’re great, when bought into the big selling waves.

 

 

About

img_0074bwcrsmTrader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.

 



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'Trader Scott’s Market Blog – Leveraged ETFs/GDX vs. NUGT – January 10, 2017' have 33 comments

  1. January 11, 2017 @ 10:24 am traderscott

    This post (link) from Jan. 4th was discussing the apathy in agriculture, and as another example, I mentioned uranium. This is what can happen when markets are in these situations, so if you don’t believe this can happen in agriculture, take a look at this (link).

    Reply

  2. January 11, 2017 @ 10:33 am traderscott

    Another example of something hated, but has been racking up signs of strength, who could possibly be bullish on Chipotle (link) with all of their problems? Apathy/hate for a stock or market, plus signs of strength = opportunity. Apathy alone is not enough, but apathy needs to be monitored.

    Reply

  3. January 11, 2017 @ 2:21 pm David V

    Is all the commotion in the dollar and gold today from the Trump fake news?

    Reply

    • January 11, 2017 @ 2:38 pm traderscott

      Point well taken David – anything to get market participants off focus. But to get back to reality, $ (link) into support, gold (link) into that $1198 resistance, and bonds (link) into resistance. I have mentioned the $ index 101.30 support and the gold resistance a few times. It’s just markets doing their thing. Keeping it simple for me.

      Reply

    • January 11, 2017 @ 4:55 pm traderscott

      And David as far as the tape reading which we discuss, that’s what those charts are about. I mentioned in the other post today about gold getting stuck at $1191 again (second time), and it needed to back up to get thru. The number 3 is very important in markets – it shows up alot. You can micro-manage this, but look at the following chart (link).You can see that $1191 I kept mentioning, and how gold got stuck there at #1. So the tape reading is about knowing where those areas are, and then “expecting” certain things to (usually) happen there. (If what “should” happen there doesn’t happen, that’s also part of tape reading.) It’s why I always talk about letting a market backup first, so it can generate the power to push thru – give it some room. If there isn’t enough power to push thru the second time, it needs to back up again. So I mentioned earlier today in the other post about gold getting stuck again at $1191 this morning, and it needed to back up again to be able to breakthru $1191 and move to the next resistance at $1198. We had the first push to $1191 at #1 with the big pick up in volume – a sign of strength. Then we had the backup at #2. Then we tried again at #3 this morning, when I said gold needed to backup again. Then we had a decent backup of $15 in #4. And then look at the next SOS at #5 and there was your power to push thru and on to $1198.30. And the next backup #6. If the trend is up, that’s then the general idea, waiting for the backups to buy, and selling some out on rallies. And when you start to get concerned about a bigger selloff, then it’s those resistance areas to really focus on to sell short. And this whole thing then is a small, but important part of tape reading. It’s why I posted those 3 charts earlier about expecting markets to get stuck there, and needing to back off. And obviously this is part of short term trading, but it can only help people to have some insight into this stuff.

      Reply

      • January 11, 2017 @ 6:08 pm David V

        Perfect, jumping the creek, I was thinking this week if I was seeing generally three pushes to break resistance, wondering if it was just imagination. Always keep reminding myself never trade in midrange.

        Reply

        • January 11, 2017 @ 6:20 pm traderscott

          Awesome comment David – so important – identify the ranges and NEVER enter a position in the MIDDLE, only the low end buy/cover, and the top sell/short. And for myself, I want to get the very lowest part of the range or below to enter long and visa versa at the top. It’s about risk, and trying to get everything out of it. But for exiting, I just use the low of the range, or top of the range – and do not try to suck every last drop out of the trade.

          Reply

          • January 11, 2017 @ 6:27 pm traderscott

            Yes jumping the creek, on a trading level, but exactly. And on a bigger picture, let’s wait and see if gold closes Friday above $1191.

  4. January 11, 2017 @ 5:59 pm Jon

    Scott, you said to expect a lot of volatility this quarter and we got it in spades today-wow! Great call on the 1191-1198 and the charts worked perfectly. I’m not nimble (or brave) enough to try and trade these swings, but watching the tape today was thrilling to say the least. Huge move in the dollar today, and looking at UUP, I’m seeing the same topping pattern the Miners put in last summer. Gold is still leading silver as well.

    Reply

    • January 11, 2017 @ 6:10 pm traderscott

      You’re doing fine Jon. Just keep doing what you’re comfortable with and you’ll do great. It’s just being prepared for the different scenarios every single day. Remember last month as silver and miners were leading gold and it was actually a concern to me. Now it’s the opposite and I’m hearing people who are concerned about this current situation. Pretty hilarious how sentiment changes.

      Reply

      • January 11, 2017 @ 7:10 pm Jon

        I’m still sitting on 1300 shares of JNUG (as a swing trade) bought at 4.2 and moving stops up below support. I know time decay is a factor, but trading the trend till my stops take me out. I may consider using covered calls at resistance. I’m hesitant though because last February I had GDXJ called away at 21 that I wish I still owned.

        Reply

        • January 11, 2017 @ 7:45 pm traderscott

          Isn’t it a great decision to have to make Jon – taking profits – no right answer, and as you know I ALWAYS sell /cover too early.

          Reply

  5. January 11, 2017 @ 6:39 pm David V

    Good article on the dollar:
    Trump’s Ignorance
    Hugo Salinas Price

    http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?offset=140&fiidarticulo=303

    Reply

    • January 11, 2017 @ 7:46 pm traderscott

      I saw that earlier David and it is good. Amazing how complacent people are about where we’re at.

      Reply

  6. January 12, 2017 @ 12:00 am peter

    learning much from the comments, all. Much appreciated. I feel like I’m in high school again trying to fathom Victor Hugo.

    Reply

    • January 12, 2017 @ 12:10 am traderscott

      Good thing markets are about hard work, not IQ, otherwise it would be hopeless for me.

      Reply

  7. January 12, 2017 @ 2:01 am traderscott

    From the January 4th post herediscussing agriculture there were some stocks mentioned – MOS, POT, CF, SOIL, and Dmitrii added IPI to the list. I keep bringing up stocks which have been out of favor for awhile and are showing signs of life. The biotechs in the December 7th blog for example. I did initial purchases of Ag/biotech stocks over the last several weeks, and another group which is very interesting is solar energy, which has been beaten down. Why in the world would anyone want to own solar stocks with a Trump Presidency? Here are some symbols which are interesting to me – TSL (chart), FSLR (chart), SPWR (chart), VSLR (chart) for your due diligence, and there are many more – this is just a start.

    Reply

    • January 12, 2017 @ 7:17 am Jon

      The Gabelli closed end funds GGN and GNT are worth looking at for passive income. Both trade at a 7% discount to NAV ( as of yesterday). GGN has more oil and agricultural holdings than GNT. I roll most of the distributions back into the funds on weakness during the year.

      Reply

      • January 12, 2017 @ 9:31 am traderscott

        Thanks Jon. The closed end discount strategy is a good one. I am looking into those today.

        Reply

  8. January 12, 2017 @ 8:13 am David V

    Gold is up against a stronger resistance line at 1205, is this buying wave running out of time?

    Reply

    • January 12, 2017 @ 9:30 am traderscott

      I am certainly not buying here, and without a much bigger back up have no plans to.

      Reply

      • January 12, 2017 @ 9:33 am traderscott

        And the $ is starting to get more bullish.

        Reply

  9. January 12, 2017 @ 1:10 pm Jon

    Miners are looking “heavy” at mid day. Not buying the short covering gold rally…

    Reply

    • January 12, 2017 @ 1:19 pm Jon

      Plus gold normally gets a Friday “spanking”…

      Reply

      • January 12, 2017 @ 1:27 pm traderscott

        The numbers I’m watching for the close tomorrow are above $1191 gold and $16.95 silver.

        Reply

    • January 12, 2017 @ 1:22 pm traderscott

      And more good day trading setups Jon when NUGT/GDX filled the upside gap, and JNUG/GDXJ went to new highs, with plenty of opportunity for at least partial profits to cover into weakness.

      Reply

      • January 12, 2017 @ 4:16 pm Jon

        I sold 13 JNUG 10 calls at .85 and covered at .50 before the rebound. The delta on these is insane. Whats more insane is selling/buying derivatives of a derivative. Call me Capt. Insano…

        Reply

        • January 12, 2017 @ 4:43 pm traderscott

          Plus the underlying which is super volatile on its’ own. But in this business, it’s about the bottom line. It worked. That was a very solid resistance area/good entry point in GDXJ today, but JNUG alone was good enough for me, you’re much braver than I am.

          Reply

          • January 12, 2017 @ 7:14 pm Jon

            I normally do not day trade but think I will give it a try using out of the money covered calls with JNUG as I did today. The volatility is what generates the extreme moves in the options, so the plan is to use covered options vs buying/ selling the underlying since my basis is 4.85 on JNUG. This could all blow up,but I’m using less than .02% of my capital. I’ll keep you posted…

          • January 12, 2017 @ 8:09 pm traderscott

            For daytrading specifically, there is no more powerful tool than support and resistance – and trusting it to “work”.

  10. January 13, 2017 @ 7:22 am David V

    Jon, if I can make a day trade you should do good at it. Scott gave more great advise about “trusting”your support and resistance lines.
    It’s when i think the stock will fail to move from the middle of a trading range that an apex will form and then it will move one way or the other, “patience'” as the coach reinforcingly says.

    Reply

  11. January 13, 2017 @ 10:27 am traderscott

    In the comment from yesterday morning, I stated my belief that the $ was now beginning a bottoming process for the next leg higher. It’s had a rally, but on a short term trading basis, the Euro came back to support, as did the bond market (where I have a position trade from 6 weeks ago). Also stated was gold had a bigger resistance area to deal with above $1198 (1198-1202), and needed a bigger pullback – David thought the resistance was $1205, and he nailed it. Gold/miners needed to back off for a bit ($20) and re-energize. And I have leveraged trading positions.

    Reply

    • January 13, 2017 @ 10:39 am traderscott

      Sorry, confusing. Buying into weakness today/support – day trades, where I’m quick (too quick, but it works for me because of buying into deep selloffs and visa versa) to take profits. Daytrading to me is not making a bet on anything, except the market moving from point A to point B, and getting out well before point B.

      Reply


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