Disaster: The Beginning, or the End?

by JDH on February 29, 2020

Quite a week, eh?

Last week I was bragging about how it was a great week for gold; everything looked great.  This week, not so much.

NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, the highly leveraged way to play gold shares, closed a week ago at $38.38.  Now it’s at $23.10.  That’s a loss of 40%, in one week.

(See what I mean by “highly leveraged”)?

The price of gold peaked around $1,689 on Monday, and closed the week at $1,585, for a drop of 6%.

So what does this mean?

Is the world ending?  Will all stocks go to zero?  Or are we due for a bounce?  Is this correction over-done?

The low point for NUGT on Friday was $20.80; it was last at that level on June 13, 2019, so in one week we managed to wipe out eight months of gains.  That’s not good.  But, as you can see on the chart, the long term blue uptrend line that started in September 2018 remains intact, and will, as long as NUGT doesn’t drop much below $20.

The Relative Strength Index is down to 32, a level which generally indicates overbought conditions.

So, if you want a prediction, I’ll predict a bounce next week.

However, I’m not predicting new highs next week.  We now have massive overhead resistance, so it will take a while to get back to where investors feel comfortable deploying cash.

The DOW chart is similarly instructive.  The bottom on Friday put us back to the levels of a year ago, but the RSI is down to 17, and when it gets that overbought a rally almost always follows.

If it’s going to bounce, now is the time.

One more chart, just for fun:

Here’s AAPL – Apple, but only a one day chart, from Friday.

Looks great, eh?  It opened at $257 and closed at $273, and in the last 15 minutes of trading it went from under $266 to over $173.  That’s almost a 3% bounce in 15 minutes.

If the Big Boyz decide they have made enough on their shorts, they can goose this baby higher very quickly.

So your choices are

  • stay on the sidelines and see what happens
  • sell everything because the world is ending, or
  • buy

I’m not selling anything; I will deploy some cash, but I’m not going crazy.  I don’t think this is the buying opportunity of a lifetime, but I did pick up some Apple call options on Friday, and if there is a bounce I’ll sell them early in the week.  If the crash continues I lose my money, but it’s a small amount, so no worries.

As for gold, even though it was at a yearly high, when you get a margin call because all of your other holdings are down you have to sell whatever you can, so gold falls as well.  But I suspect it will bounce back very quickly, so if you have cash, roll the dice!

Or not, we’ll know soon enough.

Thanks, enjoy the roller coaster, and see you next week.