Gold Miners: Watch This Chart Closely!

| May 16, 2014 | 0 Comments

gold minersNo doubt about it, trading in gold mining stocks has been rather uneventful for the past few weeks. With the price of gold stuck in a relatively tight trading range between $1,280 and $1,320, miners are reacting with a serious case of the doldrums.

But that may be about to change…

An interesting (and potentially profitable) technical pattern is developing in the Market Vectors Gold Miners (GDX).

Let me show you what I mean…

Market Vectors Gold Miners

In case you’re unaware, GDX is an ETF that tracks some of the world’s largest gold miners. Goldcorp (GG), Barrick Gold (ABX), and Newmont Mining (NEM) are just a few of the mining names held in GDX.

As you can see in the chart above, the recent spate of low volatility in gold stocks has GDX consolidating into a tighter and tighter range. The compressing blue trend lines reflect the growing uncertainty in this market.

But here’s the deal…

Technical situations like this nearly always result in the spectacular price move.   When an ETF as liquid and popular as GDX experiences a consolidation of this magnitude, the odds of a big price adjustment rise dramatically.

The only issue is figuring out which way this impending move will go.

You see, consolidation patterns like the one above give little sign of future price direction. All we know is the market is about to get much more volatile than it has been the past few weeks.

However, there are ways to trade this pattern profitably…

The first way is to wait for GDX to break out of the pattern, initiate a position, and ride the breakout momentum higher or lower.   In other words, you could establish a short position if GDX broke below $23.50 (the lower blue line). Or you could establish a long position in GDX upon a break above the upper blue trend line at $24.00.

But that’s not the only way to profit…

The options market provides an even better way to capture gains.

Instead of going long or short the actual ETF, you could simply purchase call or put options.   If GDX breaks above the upper trend line, purchase an at-the-money call option. If it breaks below the lower trend line, buy an at-the-money put option.

The best part about using options is your risk is limited to the premium you pay for the contract.

In the case of GDX, at-the-money call and put options with a June expiration are currently running around $50 per contract. So your total risk on a trade is $50 multiplied by the number of contracts you purchase.

But the best part is, if GDX has the explosive price move like I think it will, you could easily see your $50 turn into $100 or more- a 100% return on investment.

It may sound unbelievable to you, but we’re using this option strategy in my newly launched Options Profit Pipeline. Since inception of the service in early May, we’ve had 13 trades- 5 of which jumped to gains of at least 150%.

But when I say “at least 150%” I’m really not doing it justice. To be exact, we’ve had gains of 611%, 407%, 300%, 209%, and 160%- plus a smattering of trades with gains less than 100%.

No doubt about it, the options market is one of the best ways to turn a relatively small initial investment into a hefty payday.

If you’d like to discover more about using options to capture gains in commodity ETFs and natural resource based companies, click here.

Until Next Time,

Justin Bennett

 

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.