Perhaps I was a bit too hasty in mocking bears for their impotence in yesterday’s Beat the Bell. It turns out they just needed some time to sharpen their swords before striking. And strike they have, with fury. Thursday was a veritable bloodbath with risk assets across the board finally receiving their comeuppance. The weak hands abandoning equities found refuge in a variety of places, but it’s gold stocks that deserve our attention today. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) popped 2.12% making it one of the few green ETFs amid a sea of red.
GDX is also completing a multi-month triangle pattern that could continue to propel the precious metal fund higher. We’ll delve into that in a moment, but first, a few comments on Thursday’s beatdown.
The Volatility Beast Awakens
For months the the CBOE Volatility Index has been dead as a doornail. Last month’s drop to $8.84 marked a record low for the popular fear gauge. This year has been a boon for volatility sellers. Thursday their mettle was tested, big time.
By day’s end, the VIX surged 44.37%. The fact that it closed right at the high of the day means traders were panicking all the way until the closing bell. While we may see a continued ramp in volatility tomorrow, I suspect it will top out shortly. This type of fear typically signals that a rebound in stocks is nigh.
While those who entered yesterday leaning a bit too bullish are licking their wounds, there are a few silver linings to volatility’s awakening. For starters, option prices have exploded, which means you can now sell puts and calls for some of the highest premiums of the year. This is a welcome development for those tiring of the paltry premiums available of late.
Safe Havens Surge
The capital fleeing stocks found its way into two classic safe havens — precious metals and treasury bonds. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) was up 0.74% while the iShares Silver Trust (ETF) (NYSEARCA:SLV) rallied 1.25%. Meanwhile, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) popped 0.85%. While bonds probably deserve a solid analysis on their own, we’ll save that for another time. It’s metals that command our attention today. To be fair, the rally in GLD wasn’t all that impressive given that the VIX skyrocketed almost 50%.
But that’s why GDX is interesting. It’s essentially high beta gold. That is, gold stocks move with the yellow metal, but have quite a bit more pep in their step. Thursday is a prime example. While GLD climbed 0.74%, GDX jumped 2.12%. Gold stocks deserve the spotlight today not just because of their elevated volatility, but also their healthier price chart.
GDX Stock Chart
The price trend of gold stocks has essentially been neutral this year. Because of the trading range, moving averages have been rendered useless. Just look at how many times GDX has sliced above and below the 50-day and 20-day moving averages. No respect!
The price pattern defining GDX over the past six months is a descending triangle (as shown by the dotted black lines).
Click to Enlarge Source: OptionsAnalytix
Notice how Thursday’s high volume rally carried the fund above the upper trendline of the pattern. That right there looks like a breakout. And it may well signal the path of least resistance for gold stocks is now higher.
Trade Gold Stocks
With GDX’s implied volatility scraping the bottom of the barrel, options for gold stocks can be purchased on the cheap. If you want to position for more upside, then buy the Oct $23 calls for $1.20. The risk is limited to the initial cost of $1.20 and it will be forfeited if GDX sits below $23 at expiration.
The max reward is unlimited, so pull out the pom-poms and root for some serious follow through. $24 is the next potential resistance zone so consider that your first target.
As of this writing, Tyler Craig held neutral option positions on GDX and bearish positions on TLT. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
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