TRADE ALERT: buy JNUG
Buy (stop order): 23.30 USD
Stop loss: 21.80 USD
Target: 120 + USD
Reward to risk ratio: 60+:1
Gold and silver have recently broken out of multi-year downward trend lines, as shown by the charts below. The price action over the last two days of last week indicate that this breakout is likely to hold, which, combined with the unbreached lows of December 2015, would confirm the beginning of a new multi-year bull market in precious metals. There are also a number of fundamental reasons why the price of gold and silver can be expected to increase over the coming years. For more insight into this, I recommend this blog.
With this in mind, I recommend to go long (buy) JNUG. JNUG is a leveraged ETF (exchange traded fund), with the aim to produce 3x the performance of the MVIS Global Junior Gold Miners Index. More information about this ETF can be found here. Gold miners' profits have a leverage to a rising gold price, as their costs remain fairly constant, while their revenues increase. This ETF is a popular way to speculate on trends in the price of gold and silver, and may also trade at a premium to the index in the future.
The reasons for buying JNUG are already compelling, and you could simply do that. However, if we examine the price action of JNUG, there is the potential to substantially increase our reward to risk ratio.
After a dramatic fall from the summer of 2016 (note that this also corresponds to the first attempts to breach the descending trend line from the previous charts), JNUG has been consolidating around current levels and formed a trading range between $14 and $22. However, over the last week, while gold and silver consolidated after their break of the trendline, JNUG followed them by breaking out of this trading range, which now appears to be a rectangular bottom. This is shown in the chart below:
Note that Friday (the last bar) saw a retest of this trading range, but buyers entered at this price and sent the price to close near the high of the day. This indicates that the resistance at the top of the trading range has now become a support for the price, and gives us a nice low risk entry point.
Therefore, I recommend to place a buy stop order just above the high of Friday, with a stop loss just below the low of Friday's prices. This stop order entry will ensure we only get triggered into the trade if the price continues to rise next week.
As for the target price, our initial target is set by the high from last summer. This already gives us a massive potential reward compared to the risk. However, if this is truly the beginning of a new bull market in precious metals, and we manage to stay in the trade, we can expect JNUG to climb far higher.
Good luck!
If the trade entry is triggered, the stop loss will be adjusted as the trade progresses and our position may be closed early based on price action. Please pay attention to your risk management - I recommend not to risk more than 1% of your account per trade.
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