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As I write, gold is trading at $1,389 an ounce. This means the price is down well over $50 an ounce since printing its highs back on the 25th of last month. What investors and traders need to remember here is that all we are getting here is a natural profit-taking event. Gold trades in daily, weekly, yearly, and multi-year cycles. All we believe that is happening here is that we are dropping down into a daily cycle low. The more steep the present decline in the price of the commodity, the more likely a robust rally will ensue thereafter when we finally bottom.
The mining complex is finally moving down with the price of gold. VanEck Vectors Junior Gold Miners ETF (GDXJ) for example is down almost 3% as I write. This ETF is a leveraged play in the mining sector. Before we get into how the juniors have been cycling, let’s discuss why swing plays remain a core strategy of our portfolio.
Although trading and investing are many times linked together, many value investors, for example, believe that trading is totally alien to what they do. We get this. Researching a company (which may be temporarily out of favor with the market) and then holding it for years on end really has nothing to do with shorter-term trading.
This is why it is essential that the trader/investor always opens the trade or investment with the end in mind. We like the engagement that swing plays bring to our portfolio. They require us to keep up to date on chart patterns and price. We firmly believe that the more opportunities we have (whether they be short or long term possibilities), the more potential our portfolio has at any given time.
Therefore, with this in mind, here is how we view a possible swing play in GDXJ at present. We will go the daily and weekly charts to see how the ETF has been cycling.
If we go to the weekly chart first, we can see that we had clear intermediate cycle lows in early September as well as mid-May. The ferocity at which price has rallied out of those May lows really has us focused on this sector in a big way. We are now on week 6 of this present intermediate cycle which means we still should have plenty of time to go before we potentially print an intermediate top. The key here is that we are continuing the pattern of higher highs which is why we will be interested in every significant bottom here.
On the daily chart, we can see that price has broken below its 10-day moving average. This usually is a signal that the daily cycle decline has begun. We are now on day 22 of GDXJ’s daily cycle, so we definitely are in the timing band for a daily cycle decline. Price topped out on day 18 which led to a daily swing high. We would be looking for at least the RSI indicator to arrive at oversold levels before we call a daily cycle low here.
For example, we can see from the Fibonacci retracements that the 38% retracement gives us a price of around $32.86 per share of GDXJ. Considering the up-move shares have enjoyed over the past month, we wouldn’t bet on price falling any more than this.
If we, for example, were able to get in somewhere around $34 a share, we believe we could potentially set up the swing trade to give us a risk/reward ratio of at least 1:3. By then, placing a stop below (2%) the price ($33.32), we believe a 6% return (from $34) would definitely be doable in the next daily cycle in GDXJ ($36.04). We would essentially be risking $0.68 per share of GDXJ to make $2.04 per share (1:3).
We remain long our core positions in this sector. Let’s see though if we get an attractive set-up for GDXJ at its next daily cycle low.
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Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GDXJ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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