Flirting With a Gold Play

I have devoted quite a few columns lately to energy. I tend to go where the volatility is present and this is a sector where many folks I know have a lot of their shorter- and longer-term trading exposure. Fortunately, it isn't all on the long side, but energy has made days a bit tougher for many lately -- as have commodities as a whole.

This drop should create some fantastic one-to-two-day trading opportunities though. Again, I'm going to turn to the gold mining stocks as a cue to the oil names. The action is very, very similar to what we witnessed just a few months ago.

If we take a look at the Market Vector Gold Miners (GDX) from August through early November, we'll see a very similar style of drop compared to many of the oil related names I mentioned this morning and many more beyond that. While the ETF dropped around 40% from the August high to the November low, many individual miners were down much more than 50%.

Sound familiar? So where is the opportunity? It's in the violent, but very short-term, bounces that occur in such drops. Immediately the concerns of playing this overnight come to mind. Gaps are very likely to continue for several weeks, but I'm not focused on the overnight and the action we have seen in GDX throughout November and December paint a very clear picture that you don't need to catch the gap to make some nice coin.

Market Vector Gold Miners (GDX)

Source: StockCharts.com

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Check out the black circles on the GDX chart. Sure, there were several gaps higher, but a trader could have still make money buying the gap. Basically, in a sharp downturn like this, the market looks like it will continue to establish trend days. In other words, if the market opens higher and starts pushing higher, we're likely to see follow-through throughout the day.

That doesn't necessarily translate to a higher opening the next day, which is why I'm looking at a one-day trade. But notice how many green boxes are open. They opened up and closed higher than the open on the day. I also noted a few nasty reversals on the day, but those reversals still had the quality of closing the day in the same direction of the trend.

In the end, I think there is a better risk-reward by jumping on the trend of the early morning and trying to ride it throughout the day. If you use the prior day's low as a stopping point and you don't hold a trade overnight, you can define your risk in every trade while potentially catching some huge bounces to work off oversold conditions. It's as close to catching a falling knife as you can get without having to catch the knife.

At the time of publication, the author had no positions in the stocks mentioned.