Gold stocks were a recurring theme that popped up when I was scanning for the top trades for this week. A handful of stocks with ties to the yellow metal offer tempting buy setups after last week’s pullback.
The appeal is simple. Gold awoke into Christmas after four months of slumber, scoring a high volume breakout to fresh six-year highs. Gold stocks followed suit, though many failed to eclipse last year’s highs. Then, last week’s Iran missile scare injected scared money into metals that departed as quickly as it arrived. The subsequent pullback has brought us to the current buy-the-dip pattern.
Given the long-term uptrend and increasing momentum of the last advance in gold stocks, we have to view this retracement as a buying opportunity.
With that said, here are three top stock trades in the sector.
Top Stock Trades for This Week: Gold Miners ETF (GDX)
Source: The Thinkorswim® platform from TD Ameritrade
Traders always have two choices for playing sector or industry-based themes. Use an exchange-traded fund to bank on the entire space or select an individual company that exhibits relative strength. Our first trade idea focuses on the former with the Gold Miners ETF (NYSEARCA:GDX).
At $28, GDX offers a low-cost avenue for exposure to a diversified basket of mining stocks. Last week’s whack pushed it below the rising 20-day moving average, but multiple support zones loom close that could slow the selling. An old ceiling near $28 and the rising 50-day moving average at $27.60 are both logical areas for buyers to emerge.
Couple that with the low price tag of the fund and naked puts make sense. In timing the entry, I suggest waiting for GDX to break above a prior day’s high. This morning’s weakness suggests we might need a few days before buyers wrestle back control.
The Trade: Sell the Feb $27 puts for around 50 cents.
Newmont Mining (NEM)
Source: The Thinkorswim® platform from TD Ameritrade
If you prefer to trod the more volatile and potentially more profitable path, then individual stocks are the ticket. In selecting which component of GDX to use, I favor those with relative strength. Consider these the leaders of the sector with the strongest trends. Newmont Mining (NYSE:NEM) is a great choice.
Its outperformance is on full display this morning. While GDX is down 1.50%, NEM is rallying 0.9%. And with that, it’s back above its 20-day moving average, triggering the retracement pattern that put it on my radar.
At $42, it’s also cheap enough to consider naked puts on.
The Trade: Sell the Feb $41 puts for 65 cents.
Pan American Silver Corp (PAAS)
Source: The Thinkorswim® platform from TD Ameritrade
Pan American Silver Corp (NASDAQ:PAAS) beats out its predecessors in one regard. While GDX and NEM haven’t yet cleared their five-year highs, PAAS stock has. Its fourth-quarter push carried it to the highest levels since early-2012, marking superb relative strength.
With such a strong tailwind, it’s hard now to view last week’s retreat with interest. This morning’s action is mirroring the weakness of GDX, so we may need a day or two yet before bull plays are worth deploying. For now, I’d use today’s high ($22.42) as your trigger. We’re sticking with our theme of high probability cash flow plays. At $22, the margin requirement or cost of the trade will be minimal, resulting in a juicy return on investment.
The Trade: Sell the Feb $21 put for around 50 cents.
