In another thread yesterday I mentioned that yesterday was the fifth consecutive day down for GDX and that there was a trade setup to scalp a long on the GDX or NUGT. The setup was buy the open of the day after five consecutive days down (the open of the sixth day, today) and sell the close of the first up day. That’s been profitable 100 percent of the time for the past three years. Can’t get any better than that.
Ideally, the sell is the close of the buy day but it doesn’t always work out that way. For example today the free fall in the gold miners continued, and a big drop it was, so it looks as if this setup could have it first loss in three years. (I probably hexed it by posting it here.
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But the trade is not over – it is still sell the close of the first up day.
So what has happened when it doesn’t go right up?
As with five consecutive days down, if one buys the open of the day after six consecutive days down for GDX and sells on the close of the first up day that has been good for a long-side scalp 100 percent of the time in the past three years. For that matter, buying this setup for GDX after seven consecutive days down has been profitable 100 percent of time for the past three years. Buying after eight days, again 100 percent of the time. After nine days, again profitable 100 percent of the time. After ten days...well there has not been ten consecutive days down in GDX in the past three years so who knows?
Remarkably, the time GDX went down nine consecutive days the subsequent up on the 10th day made the buy on the open of the sixth day profitable. And NUGT has not had a loser in its entire history on these setups (NUGT is less than three years old).
For the record the biggest loss on this set up was in 2008, 12 percent (a lot was going wrong in 2008 if anyone recalls...), followed immediately by the setup's biggest win, 17 percent (volatile times in 2008 if anyone recalls...).
These many consecutive days down in the gold miners are a relatively rare events so there are not that many trades (six in three years to be exact). Statisticians would probably tear their hair out; traders, I believe, not so much...
Maybe it'd be better to look for the losers longer term. Have to do that with GDX since NUGT so far hasn't had any. GDX has been around since 2006. In that time, if one bought it after five days down on the open of the sixth day and sold it on the close of the first day up, those trades would have been profitable according to my back test 71 percent of the time and would have made money every year except 2009 when it lost point-seven percent on two trades (1 winner, 1 loser) and 2007 in which it was flat (actually down on one trade $261 on a $1mil buy of the ETF). Like all setups, this one is not perfect but, on a limited number of trades being in the market hardly any time at all, it’s probably better than most hedge-fund managers and probably better than all mutual fund managers.
Regardless I may have the first loser in three years on my hands but as any experienced trader knows a loser in even the best setups is inevitable -- that's just the market...
Good luck and good trading.
P.S. As noted above, a buy on the open after six consecutive days down (tomorrow's open) has been profitable eight of nine times (89 percent) with GDX for its entire history, and if by chance it goes down again tomorrow, that buy on the next open goes once again to 100 percent.
Of course it could be different this time since the gold market is at the moment in complete disarray but I'm betting it isn't entirely...
"If you've heard this story before, don't stop me because I'd like to hear it again," Groucho Marx (on market history?).
“I've learned in options trading simple is best and the obvious is often the most elusive to recognize.”
"The god of trading rewards persistence, experience and discipline, and absolutely nothing else."
