Is the sky falling?
At the time of this writing, it most certainly is not.
Yet with all the fear-based, hot-take reporting splashed all over TV screens and newspaper headlines, it’s not hard to imagine why someone might think otherwise.
Between the European Union referendum vote, the Federal Reserve meeting in July, and the impending U.S. presidential elections, there’s a lot on people’s minds – mine included.
But while things might not be so peachy, they’re not always as bad as they seem, either.
Long-term investors cringe at volatility, but short-term traders are having a field day with it.
And as I noted in last week’s article, fear is causing a lot of disruption in the financial markets.
Today, I’m going to dive into one of the strongest fear plays in the market right now…
Baked in the Cake
Before we get into the trade, let’s talk a little bit more about chart analysis.
Assuming all things being equal, all the fundamental data about a specific stock – sales figures, debt, valuation ratios, basically all the public financial information available on a company – is already worked into the stock price.
Taking this same approach when looking at a stock chart, it’s easier to focus solely on the price action.
Or rather, how the market interacts with what it knows – and what it thinks it knows – about a stock.
And short-term traders are most likely going to trade based on a stock’s momentum.
To do this successfully, a trader needs to identify the trend as well as both its support and resistance levels.
If a stock is making higher highs as well as higher lows, we say that the shares are in an uptrend.
The inverse holds true, as well: If a stock is making lower highs and lower lows, it’s in a downtrend.
Seems simple enough, right?
Additionally, a stock’s support acts as a price floor, while resistance works like a price ceiling. These are the parameters between which the battle between the bulls and the bears plays out.
As a stock rises or falls on a chart, it’s always pushing these boundaries, either furthering the current trend or reversing into a new trend.
All That Glitters Is Gold
Gold is one of my favorite momentum plays, due to its strong negative correlation to stocks. When stocks fall on heavy volatility, investors pile into gold. But when stocks recover, gold gets dumped. Hard.
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And as you know, the financial markets never go up or down in a straight line. They move, rather, in a wave-like motion.
So, if an investor is looking to trade gold upside during a downtrend in stocks, they’ll want to strike when stocks are on the rise. More specifically, when gold pulls back to a near-term support level.
And fortunately, one such opportunity has just arrived.
Don’t Fear the Trade, Trade the Fear
The VanEck Vectors Junior Gold Miners ETF (GDXJ) tracks some of the strongest junior miners in the world.
It’s one of the more volatile plays on gold, but it captures more opportunity from fear mongering than a physically backed gold fund like the SPDR Gold Shares ETF (GLD). And it can produce big gains in short order without breaking the bank.
The fund broke through key horizontal resistance at $39.20 in early June and just rallied to a fresh 52-week high, which corresponds to the fund’s April high.
The bears have, unsuccessfully, tried to force GDXJ below this support for the last two weeks.
From a trader’s perspective, when previous resistance becomes strong support, it’s a very attractive entry point for the bulls.
And with the Federal Reserve’s July meeting looming large, gold may become an even bigger target for nervous investors.
Simply put, now is the perfect time to trade gold ahead of what may turn out to be a rough road for stocks.
You could hold GDXJ through the Fed meeting next month for a quick “fear” gain, or hold on a bit longer to capture volatility upside throughout the summer.
Either way, the time to trade this trend is now.
On the hunt,