Bullish Leveraged Gold ETFs Hammered – Is a Pullback Warranted?

Leveraged ETFs are volatile and a trader’s paradise.

Bullion.Directory precious metals analysis 9 March, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Gold-backed ETFs have lost quite a bit of luster, following non-farm payrolls report on Friday suggesting 295,000 jobs were added in February. This sparked speculation that the Federal Reserve could raise rates as early as June, while eurodollar traders are still predicting an October rate hike.

With the slight potential of any substantial change in interest rates, traders quickly pulled their capital from both leveraged and non-leveraged precious metals ETFs.

Terry Kinder, technical analyst at Bullion.Directory, came out with an interesting and accurate piece on a leveraged ETF last week, which gave insight on the potential direction for gold. The Direxion Daily Junior Gold Miners Index – 3x Leverage (JDST) was the focal point of this article, in which price geometry was indicating a potential drop in gold prices looming – and drop it did by more than 2.5 percent.

JDST has been trending higher while the gold price has been slightly down to flat recently. The inability of the gold price to rise and hold above $1,208.00, on a weekly basis, is troublesome and could mean the gold price will slip to $1,191.00. Should $1,191.00 fail to hold, then gold could visit $1,174.00

With a 22 percent gain on Friday, and more than 15 percent upside on Monday, JDST and other bearish leveraged gold-backed ETFs saw a significant surge interest as traders digest economic data. Although extremely volatile, these exchange-traded funds are a great way of determining short-term trader sentiment. Capital will often move out of leveraged ETFs after large gains, as we saw with the bullish gold-backed securities lost momentum after failing to find price expansion past $1,304.

In early February, traders pulled over $33.2 million from the bullish daily gold miners ETF NUGT, while putting money to work in bearish funds. Traders would then take profits and reinvest in funds that have been beaten up to balance leveraged exposure in the direction of the market.

Given the large gains seen over the last two days, there could be support on the cards for leveraged minor ETFs following profit taking. NUGT, Direxion Daily Gold Miners, is the 3x leverage of the Market Vectors Gold Miners ETF (GDX).

Price action is heavily to the downside, reaching support at $9.11 – forming a triple-bottom on the two-hour chart. Price visited this level on December 16 and 24, and NUGT is currently treading water.

A short-term pullback is probable given the steep oversold condition, with the RSI at 16. The – DMI has ticked lower, signaling that downside could take a breather. However, the ADX is still sloping upward which is indicative of  strong trend continuation.

Next, the underlying benchmark GDX is showing the same negative sentiment. The chart, in many ways, is similar to NUGT. If the gold miners ETF can rally to the targeted resistance level of $18.46, this would represent a 9.51 percent increase in NUGT, or a move to $9.98 and just shy of the $10.08 resistance level. If prices can extend to the second resistance target of $18.74, NUGT could potentially extend to $10.33.

Conversely, there is the likelihood that the intraday trend could continue lower. In this case, if GDX were to trade lower to the first support level of $17.55 then NUGT could move lower to $8.37 and break the triple-bottom support. A larger move to $17.35 would reflect a 28.5 percent loss in NUGT, causing the bearish ETF to fall to $6.48.

 As always, intraday charts are vulnerable to significant volatility caused by headline risk and this potential outlook is only suitable for the next few trading sessions.

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