Can you smell it?
The ongoing government shutdown, the country approaching its
debt ceiling, worries over a potential default…yes, fear is in
the air. And heightened investor fear often leads to incredible
Right now I think the market is offering us one of those
chances. Take a look at the chart below.
Gold Miners (
have been absolutely crushed over the past year. The ETF that
tracks gold mining stocks is back down to 2008 levels. If you're
a long-term investor with contrarian tendencies, there is no
doubt that now is a great entry point.
But some of us like to mix-up our long-term investments with a
few nimble plays, particularly when we are greeted with great
But there's one important indicator that suggests the beaten
down sector is ready to bounce higher.
Take a look at the RSI readings below the GDX chart.
The RSI is an overbought/oversold oscillator that compares the
performance of an equity - in our case a highly liquid ETF - to
itself over a period of time. It should not be confused with the
term "relative strength," which is the comparison of one entity's
performance to another.
The blue circles in the chart above indicate each time GDX hit
an extreme oversold reading.
After each oversold reading, GDX rallied almost immediately.
Some of the rallies - including the latest in September - lasted
only a few days. But the gains were there if you were quick
enough to take them.
Other rallies lasted two to four weeks and offered
opportunities for exceptional profits.
RSI is an important tool that allows you to gauge the
probability of a short- to intermediate-term reversal. It does
not tell you the exact entry or exit point, but it helps you be
aware that a reversal is on the horizon.
Since I'm a contrarian at heart, I prefer to buy an index when
a highly liquid stock or ETF reaches an extreme oversold
So let's explore ways to take advantage of the oversold
reading in GDX. Obviously, you could buy the ETF outright. A
round lot (100 shares) would cost you roughly $2,300.
Or you could sell puts. Selling puts requires far less
capital…roughly 80% less. Not only that but, you are able to
select the price in which you want to buy the stock or in this
case the ETF outright. It's my preferred way to take advantage of
extreme oversold readings.
And I've been using the same strategy since late May in GDX
High Yield Trader
service. So far, so good…we've seen gains of over 24% while the
ETF has struggled mightily.
But regardless of the strategy, what's truly important here is
Don't miss out!