Leveraged Gold Mining ETF Could Be Due to Give Back Some Gains

The RSI for NUGT topped out north of 74 on an intraday basis last Friday

The Daily Gold Miners Index Bull 3X Shares (NYSEARCA:NUGT) is one of those leveraged exchange-traded funds (ETFs) that you've no doubt been warned about before. Although NUGT targets daily investment results equivalent to 300% the performance of the NYSE Arca Gold Miners Index (GDM), those leveraged returns tend to warp in unexpected ways over longer time frames.

So while the one-month NUGT return of 39.68%, as of this writing, is 3.15 times that of GDM (up 12.88% for the period), the one-year returns tell a starkly different story. With GDM up 4.13% year-over-year, NUGT has nevertheless stumbled to a decline of 16.88% (representing roughly quadruple the inverse of its basis index's performance).

As spot gold prices last week popped to new 52-week highs on the back of soft U.S. jobs data and rapidly simmering geopolitical tensions, traders plowed capital into the sector-dominating SPDR Gold Shares (GLD), which offers fairly straightforward exposure to precious metals prices. On Wednesday alone, GLD garnered net inflows of $149.96 million, but gold bugs seemed relatively uninterested in the miners; the leverage-free VanEck Vectors Gold Miners ETF (GDX) registered net outflows of $16.94 million on the day, while NUGT attracted net inflows of just $3.86 million.

But perhaps traders think NUGT is looking a little frothy. First, consider that last week's gain for the ETF, totaling 5.8%, was its third consecutive weekly advance -- marking NUGT's longest weekly win streak since around the time of the stock market's late-December lows. As a result, the bullishly leveraged ETF notched a Friday close above its descending 80-week moving average for the first time since the week prior to the November 2016 U.S. presidential election. Previously, this long-term trendline had acted as stiff resistance for all NUGT rally attempts since February.

What's more, NUGT intensified an ongoing assault on its 320-day moving average. The fund closed four straight days above this level for the third time in 2018, and has closed eight of the last nine trading days above this trendline. Again, the leveraged gold mining tracker hasn't enjoyed a streak like that above its 320-day since the fourth quarter of 2016.

Against this backdrop, NUGT's 14-day Relative Strength Index (RSI) ascended last Friday to a reading north of 74 for the first time in nearly two years, albeit only on an intraday basis. The last time the fund's RSI closed that high, in early September 2017, NUGT went on to shed 36% of its share price value over the next three months. So from a purely technical perspective, it would reasonably appear that NUGT is nearly due for something of a reversion to the mean, in terms of retracing some portion of its freshly collected gains.

But what gold-mining skeptics and technicians alike should bear in mind (alongside the particular vagaries of trading a leveraged ETF to begin with) is the "unpredictability" factor, in terms of the macro-level catalysts that can spark big directional moves for the gold complex. In the short term, any sentiment-rattling headlines regarding Iran, trade, or the Fed's future rate path could easily -- but, perhaps, surprisingly to some -- give NUGT the momentum boost needed to extend its fledgling breakout above long-time resistance levels.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 16.