Drilling for a Gold Pop! (FNV)

First the big picture, then a micro-drill-down, and then a fun-house gripper of a trade.

Here we go…

 

Big Picture:  Global Equities in a Funk!

With the majority of the world’s equity markets slipping toward oversold, the U.S. Dollar has been the recipient of moderate to strong inflows. In fact, it’s almost axiomatic these days to see the world’s rich and powerful taking refuge in the buck when crises small or large hit their homelands. And with the dollar’s rising tide, we’ve also witnessed a negative effect on the price of commodities. But we’ll get there in a moment.

 

First we look at the global equity scene:

 

WSE1

 

As the above chart demonstrates, nearly all the world’s major markets are moving toward oversold, are already there or have bloody well given up the ghost.

 

The S&P 500 (in black) is faring slightly better than most, to be sure – with the NASDAQ performing much better! (not seen on chart) – but the momentum is clearly in favor of the sellers.

 

As mentioned above, that’s been nudging the dollar higher in a clearly bullish pattern.

 

See here –

 

WSE2

 

Since mid-May, precisely when world markets started diving into the tank, the dollar has been zig-zagging higher (in red), tracing out higher highs and higher lows in an archetypal bullish move toward her former highs just above 100. RSI has also been gaining ground (in blue), and once she’s solidly trending above her midway waterline, we’ll see a renewed move northward for the buck. And it appears we’re almost there.

 

Micro-Drill Down: Commodities in the Crusher!

 

All this, of course, has rendered the commodities comatose and in search of a lover.

 

This is the PowerShares Deutsche Bank Commodity Index Tracking Fund (NYSE:DBC), a relatively good proxy for the commodities as an asset class. And it clearly shows the damage done with the dollar’s rise of late.

 

Take a peek –

 

WSE3

 

Those who follow or trade the commodities know that for years there’s been little but depression, fear and angst from this quarter, and that the last three months have merely ratcheted up the dread level another notch.

 

Yesterday’s trade set a new bear market low for DBC, and there’s faint hope it’ll be the last. We look to the clear lack of selling volume as the move progressed (in black) as proof that the vast majority of DBC investors are quite content to hold their positions for the meantime. Perhaps they’re so deadened by the abuse they’ve endured since the bear market in commodities began seven years ago that they’ve turned cadaver! – alive only to the prospect of ever more losses on their DBC trades.

 

WSE4

 

That said, the bulls might have reason to expect a near term rebound, as the entire asset class plunges into the oversold (blue box, above). Daily Relative Strength (RSI) indications show a stock that’s primed for a bounce, even if short in duration and dwarflike in size. And that may be worth playing.

 

But not with DBC stock.

 

The subsector of the commodity class that’s been most affected by the selloff is the precious metals, which just ten sessions back crashed below support to set new bear market lows in their ongoing four year downtrend. And it’s there we intend to make our money.

 

As the following chart of the SPDR Gold Trust (NYSE:GLD) shows, the shiny metal may be due for a quick bounce higher in the short term –

 

WSE5

 

Just as DBC’s chart indicated an oversold stock, so, too, GLD’s RSI went deep into the oversold last week (in black). The difference here is that GLD had a decent pickup in volume (in blue), which could indicate a near term bottom is in place.

 

Over the intermediate to long-term, we don’t have much faith in gold, as all the signs of a continued selloff are present. But the likelihood of a bounce should not be underestimated. Particularly in light of another technical phenomenon that we’ve discussed a great deal in these pages called a “bullish enveloping” pattern.

 

It looks like this and the explanation follows –

 

WSE6

 

Japanese candlestick charters have a wide array of formations that speak to reversals and momentum changes in stocks, and this is one we’re particularly fond of.

 

The “bullish engulfing pattern” on the chart occurred at the opening of trade this week and signals the end of the downtrend that began in mid-June. The uptrend that ensues will not last last long, we believe, but according to volume figures could well entail a sharp spike higher, carrying as high as the 109/110 range.

 

WSE7

 

We wouldn’t. We think there’s a better bet.

 

The Miners Are Goners

A look at the Market Vectors Gold Miners ETF (NYSE:GDX) shows a stock that’s very simply been beaten and left for dead.

 

Here’s her chart –

 

WSE8

 

Whereas gold bullion (GLD) gave up some fifteen percent of her value since the mid-May top, the miners have toppled and tumbled close to 35% since that date.

 

Mindblowing.

 

And for that reason, we expect any pop higher in the miners to be proportionally greater than that of the metal.

 

So you’re buying GDX?

 

Not so fast, Ginger.

 

The best bet for a pop higher in the miners involves singling out the quintessential gold play, the golden-boy of the field, as it were, and dedicating our trade exclusively to him. Why invest in the motley bunch, when a single star can carry the day?

 

And who might that star be?

 

Easy.

 

The hands-down best play in the mining sector is a company that doesn’t mine a single nugget. It’s a royalty player who’s been in the business for thirty years and who simply can’t be beat.

 

It’s a Canadian company that also trades on New York called Franco-Nevada (FNV), and the shares currently go for $40.25. There are listed options on the stock, too, but we’re going to go one better and advise you to buy the warrants that trade on the Canadian market under ticker symbol FNV.WT.A.

 

These are wildly leveraged instruments that stand to return far more than any CALL option should FNV bounce from here.

 

And we say it will.


Wall Street Elite recommends you purchase the Franco Nevada A Warrants, trading on Toronto for $8.00 even. If you can’t access them, try a purchase of
the FNV September 45 CALLs for $0.70 each.

 

With kind regards,

 

Hugh L. O’Haynew

See what people are saying...

  1. David Noll

    THonk its a little early but in a month or two Id do the trade in a heart beat.

    Thanks

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