2023-03-22 16:42:35 ET
Summary
- If gold has printed an 8-year cycle low, NUGT will undoubtedly attract interest among speculators.
- Buying volume has been to the fore in recent sessions. This trend points to rising prices.
- The triple moving average crossover strategy is a solid strategy to trade this volatility ETF.
Intro
The goal of the Direxion Daily Gold Miners Index Bull 2X Shares ( NUGT ) is to deliver two times the daily performance of the NYSE Arca Gold Miners Index. In previous commentary on this instrument, we outlined the elevated risks associated with a leveraged instrument such as NUGT. We reiterated that these instruments should not be used for long-term purposes, as time decay eats into their value on a daily basis.
On a more encouraging note, instruments such as NUGT many times deliver more than their stated goal (2 Times The Gold Mining Index) when the speculator gets the trend right. This really is the key with leveraged instruments in that one must always aim to be on the right side of the underlying trend to consistently make money. A bullish trend for example can override much of that ongoing theta decay but only if the trend remains intact. If gold has initiated a long-term bull market, for example (Higher lows & Higher Highs), this would have bullish connotations for trading NUGT on tradeable bottoms.
Gold: 8-Year Cycle Low
Therefore, our first port of call is to pull up the long-term chart of gold. The yellow metal trades in an eight-year cycle so these bottoms are the best long-term buying opportunities in a bull market. As we see below, gold printed eight-year cycle lows in 2001, 2008, 2015, and potentially in late 2022 (November) and throughout all of these cycles, the metal has been making higher highs & higher lows (Bull Market). This strengthens our case for trading NUGT, although the one caveat is that gold has not confirmed that most recent 8-year low because we have not made new highs yet. Therefore, if indeed, gold does manage to take out its 2020 highs, then we have a very strong buying opportunity in this sector at present and obviously also in NUGT on tradeable bottoms. Therefore, the following is clear. Given where we are currently in gold's long-term cycles, the longer we remain rangebound or indeed rally from current levels, the stronger the likelihood that indeed the eight-year cycle low is already in for gold (November 2022).
8-Year Cycle Low Potentially Took Place In 2022 (StockCharts.com)
Bringing the above information back to NUGT's daily chart, there definitely are signs that gold & the mining complex have indeed completed their 8-year cycle lows. As we see below, NUGT actually bottomed (September) before gold last year and has been demonstrating strong momentum since then.
Bullish Volume
Furthermore, look at the NUGT's volume profile over the past 6 months or so. Volume trends can give us insights into the future direction of the ETF, and it is plainly evident that buying volume on the ETF's upswings remains larger than the selling volume on NUGT's downswings. Although NUGT did pull back in recent sessions on hitting overhead resistance, buying volume remains very strong, which means another test of this resistance should take place rather shortly. The upside gap shown below is a sign of market strength in NUGT and price may very well stay above this level in upcoming sessions.
How To Trade NUGT In This Bull Run
Therefore, to ride this potential uptrend in NUGT, the best way to invest or speculate in NUGT is to use the triple crossover strategy. This method can be used on the intermediate (weekly) or daily charts, but we will focus on the daily chart in this article. As we see below, we have NUGT's 4, 9 & 18-day moving averages. In an upswing, a tentative initial buy signal is given when the 4-day passes above both the 9 and 18-day. The buy signal is then confirmed (Which we have now) when NUGT's 9-day moving average passes above the ETF's 18-day moving average. For sell signals, the exact opposite rules hold true when NUGT is turning over.
Now, as mentioned, NUGT can also be traded using the exact same moving averages but on a weekly setting. The advantage of the weekly setting is that one does not need to invest as much time into managing the position. The disadvantage is that potential losses will be larger due to those slower moving averages (Which in turn will confirm the respective sell signals much later than their daily counterparts). Therefore, in order to trade NUGT successfully over time, one must be prepared to ruthlessly liquidate positions when sell signals are given.
Conclusion
To sum up, although NUGT entails elevated risk due to the time-decay element of the instrument, the potential for large gains is definitely there for the trader/speculator who can trade the instrument possibility. As mentioned, the longer gold can continue well above its recent November-2022 lows, the more likely that it has printed a fresh 8-year cycle low. This is bullish for NUGT due to the leveraged nature of the ETF but only should be traded when strict guidelines are adhered to as alluded to above. We look forward to continued coverage.
For further details see:
NUGT: Fortune Favors The Brave (Technical Analysis)