Scott Pluschau is a Contributing Editor to the ETF Digest.
Scott was a financial advisor with Citi. His technical analysis report on the Nasdaq Composite Index was recently featured by Dr. Marc Faber in his June 1, 2011 Gloom, Boom & Doom report. Scott earned his degree in Accounting and Taxation from Pace University. He lives in Long Island with his wife Ilona, daughter Olivia and new baby Henry.
The Gold Miners ETF, symbol GDX is now at the extremes of its mature balance area.
It was back on May 12th, 2011 that I had a write-up on the Gold Miners ETF symbol GDX.At that time GDX was in Horizontal Development using auction market principles as my guide. I felt that there was a favorable trade location for the “responsive trade” off of support inside that balance area. We took an outright position in GDX on May 13th, 2011 at a price of $54.68. Yesterday GDX closed at $63.70, a gain of approximately 16% in just over a quarter of a year.
Balance areas are where the market has found value in a particular price range in a certain time frame. I find it risky to trade anywhere in the middle of these consolidation areas as it is likely to lead to random price movement, and that means I am guessing. Guessing doesn’t work for me. The most favorable trade locations for me are at the extremes of the balance areas, where I can better calculate the probabilities, and I can clearly define my risk, and target my reward. With the responsive trade I prefer to fade the balance area with the prior trend, and GDX did offer me that exact opportunity at that time. In order for me to be successful I have to be consistent over time with these types of trade setups. I do not trade with the focus on making myself a fortune overnight nor do I focus on a high percentage of winning trades.
Looking at the chart of GDX in the weekly time frame, I strongly believe there may be very little resistance on a breakout to a new 52 week high on a pattern such as this.
Is it possible for this breakout to fizzle? Absolutely. However these initiative moves on an increase in volume from a mature balance area often lead into vertical development and offer the greatest probabilities along with the greatest reward to risk. You can go back to the beginning of auction markets over a hundred years ago, and see these types of trade setups and how well they performed. The path of least resistance is higher in an example such as this. Any low volume throwback to the prior breakout area afterward should offer new support, and thus becomes a low risk trade to add to the position. My initial target is the width of the blue rectangle that I have drawn on the chart, which is approximately 10 points or $72.
What is going to be the catalyst that drives GDX downward after a new 52 week high? I have no idea and I don’t care. Until supply meets demand in the weekly time frame, I’m staying long with the proper risk management and position sizing, and the discipline to follow through with the trade management.
When it comes to auctions and vertical development, it is a bad move in my opinion to position yourself against that kind of momentum. Sure some “hero” gets it right once in a while going the other way, but those who consistently do try to time the top, consistently lose their money in this business. It’s basically a deadly ego game that leads to rationalization, denial, delusion, averaging down, and the “Loss Trap”, but those psychological issues are an article for another day.
I’m now looking to add to my position. If there is a failed breakout of the balance area I will close out my trade, with the discipline to re-enter on the following breakout. It is not uncommon to get the first initiative move wrong, and nail it good on the next attempt as the balance area only becomes more combustible.
In full disclosure I also own GDX Leaps to January 2013 at a strike price of $40.
Hello Scott,
Thanks for the contribution; highly appreciated as always.
I watched GDX since your last "one" but to my deep regret I did not act; as I feel rather more comfy with your take, I may do so this time.
Sincere and best regards,
Stef.
France
Scott Pluschau is a Contributing Editor to the ETF Digest.
The Gold Miners ETF, symbol GDX is now at the extremes of its mature balance area.
It was back on May 12th, 2011 that I had a write-up on the Gold Miners ETF symbol GDX. At that time GDX was in Horizontal Development using auction market principles as my guide. I felt that there was a favorable trade location for the “responsive trade” off of support inside that balance area. We took an outright position in GDX on May 13th, 2011 at a price of $54.68. Yesterday GDX closed at $63.70, a gain of approximately 16% in just over a quarter of a year.
Balance areas are where the market has found value in a particular price range in a certain time frame. I find it risky to trade anywhere in the middle of these consolidation areas as it is likely to lead to random price movement, and that means I am guessing. Guessing doesn’t work for me. The most favorable trade locations for me are at the extremes of the balance areas, where I can better calculate the probabilities, and I can clearly define my risk, and target my reward. With the responsive trade I prefer to fade the balance area with the prior trend, and GDX did offer me that exact opportunity at that time. In order for me to be successful I have to be consistent over time with these types of trade setups. I do not trade with the focus on making myself a fortune overnight nor do I focus on a high percentage of winning trades.
Looking at the chart of GDX in the weekly time frame, I strongly believe there may be very little resistance on a breakout to a new 52 week high on a pattern such as this.
Is it possible for this breakout to fizzle? Absolutely. However these initiative moves on an increase in volume from a mature balance area often lead into vertical development and offer the greatest probabilities along with the greatest reward to risk. You can go back to the beginning of auction markets over a hundred years ago, and see these types of trade setups and how well they performed. The path of least resistance is higher in an example such as this. Any low volume throwback to the prior breakout area afterward should offer new support, and thus becomes a low risk trade to add to the position. My initial target is the width of the blue rectangle that I have drawn on the chart, which is approximately 10 points or $72.
What is going to be the catalyst that drives GDX downward after a new 52 week high? I have no idea and I don’t care. Until supply meets demand in the weekly time frame, I’m staying long with the proper risk management and position sizing, and the discipline to follow through with the trade management.
When it comes to auctions and vertical development, it is a bad move in my opinion to position yourself against that kind of momentum. Sure some “hero” gets it right once in a while going the other way, but those who consistently do try to time the top, consistently lose their money in this business. It’s basically a deadly ego game that leads to rationalization, denial, delusion, averaging down, and the “Loss Trap”, but those psychological issues are an article for another day.
I’m now looking to add to my position. If there is a failed breakout of the balance area I will close out my trade, with the discipline to re-enter on the following breakout. It is not uncommon to get the first initiative move wrong, and nail it good on the next attempt as the balance area only becomes more combustible.
In full disclosure I also own GDX Leaps to January 2013 at a strike price of $40.
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