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A Critique of DrDoolittle’s NUGT Article

August 26, 2013

Not familiar with DrDoolittle but a few brief notes on the article.

NUGT is compared with GDX.  Both are ETFs and both are based upon the performance of the NYSE Acra Gold Miners Index (GDM).  The NUGT IS NOT directly based upon the GDX.

What the Dr is doing is comparing an ETF that was developed for short-term trading (NUGT) versus an ETF that was primarily based upon intermediate to long-term investing (GDX).

I assume this article was not written with the very short-term trader in mind but with a longer more concerted view, intermediate or longer term.  Assuming this, the Dr makes one mistake (in my view) that almost 99.9% of technicians make, they use short term indicators on which to base longer term projections.  The most common is to use a short term Relative Strength Index (should be called an indicator, again in my view) (RSI) and base longer term moves on it.  The use of a 14 day RSI is a short term indicator.  I would use a 50 day RSI if I was looking at an intermediate term trend.

As for projecting how far a move might go, I usually base projections on a point and figure chart, although also head and shoulder patterns if there is one.

As a pure market technician I know that technical analysis is not perfect.  The ONLY thing a technician can promise is that if you use technical analysis to trade or invest, sooner or later you WILL lose capital.  The trick is to lose as little as possible and to let the profits accumulate.

Since the NUGT is based upon the performance of the GDM Index,  my brief analysis is of the Index.  One might then project this into what to expect the NUGT to do.

The Dr is correct in that the GDM seems to have bottomed out…at least for now.  The 50-day RSI shows a very distinct positive divergence between the low in mid-April (the low point for the 50-day RSI) versus the low in late June suggesting that the low in late June might be a good bottom for awhile.  On the 15th of August the 50-day RSI moved into its positive zone for the first time since early November.

My short-term moving average has crossed above the intermediate term average for another reversal signal and now the intermediate-term average has turned upwards for a confirmation.

We also have a higher high preceded by a higher low in the daily price action suggesting a positive trend.

The negatives are that the daily price action is now butting up against a negative long-term moving average and appears stalled.  In addition the action is in a heavily resistance area due to earlier action.  There is a serious negative downside trading gap in mid-April that needs to be overcome if the trend is to continue from here.  That would require a move by the Index through the 900 level (it is presently at around the 848 level). 

For volume action I must look at the GDX and NUGT volume.  Both are no great shakes.  They, in my view, are underperforming where they should be if all were bullish.  The sharp increase in volume activity shown in the Dr charts is almost as much negative activity as it is positive, when one looks closer to the daily action.

Lastly, the Point and Figure chart.  My P&F suggests that there is yet no upside break with which to project a positive move.  Once the GDM Index moves to the 875 level, we can then project a break-out and a move to the 1225 level.  Assuming the 3X movement of the NUGT, that would mean a 120% move from the break-out level.  So, watch the GDM.  Of course, most of the time the initial P&F move is far exceeded, but to where one will not know until more action is available.

One final note: At the initial downside break in mid-2011 I could calculate a move to 650, which it recently made.  A subsequent projection takes it to 250 which may yet be ahead.  Initial projections have about an 80% accuracy rate.  Each subsequent projection has lower and lower accuracy.

In my view I would wait for a move by the GDM to the 875 level before acting.  It just might go lower before then -- but there are always risks either way.

Merv is a retired Aerospace Engineering consultant.  He is also a retired market technician with over 40 years of market experience and research.  Merv received his certification as a Chartered Market Technician (CMT) in 1992. Developer of many technical techniques and programs which he has been using in his previous Technically Speaking with Wil-Arm and Technically Precious with Merv commentaries posted throughout the globe.  Developer of several gold and silver Indices, Merv continues to update his Merv’s Gold & Silver 100 Index and Merv’s Penny Arcade 50 Index and reviews them during his periodic on-going Technically Precious commentaries. 

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”
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