Yes, while I have written about the likely strength and bullish outlook of the USD Index in general, this kind of resilience is surprising even to me. I thought we would see a bigger correction now – after all, the USDX rose 8 index points without a bigger drop.
We don’t see it now, which could mean it will still happen in the coming days, or that the momentum for the USD is so remarkably strong that it will just consolidate here and trade sideways rather than actually correcting.
Either way, after this week, the USDX could be back in rally mode due to the monthly turning point (vertical, dotted line). My comments from yesterday about it remain relevant:
Will we see a correction soon? That is very possible. After all, no market moves in a straight line up or down without periodic corrections.
Will the correction in the USDX trigger a rally in gold and mining? I wouldn’t say that’s necessary. The most recent boost to both markets was based on geopolitical unrest (a new type of unrest used by Russia), and these tend to have only a temporary impact on prices. Today’s drop in gold and USDX confirms this. So it is entirely possible that we see a decline in gold and the USD index at the same time.
The profit-taking levels I specified for the GDXJ, as well as the targets for Gold, Silver, JDST and JNUG remain current. And speaking of JDST and JNUG, I’d like to show you something. Let me show you why my preferred strategy to profit from the decline in junior mining stocks is to short JNUG – a leveraged ETF based on GDXJ, and not short GDXJ itself. Of course, using leveraged instruments may not be applicable to everyone, especially novice investors. So please keep in mind that this is not individual investment advice specifically aimed at you.
Both: JNUG and JDST are ETFs that provide double leverage on GDXJ price movements and multiply DAILY price movements every day (or at least that is the goal). The JNUG is the direct ETF and the JDST is the inverse ETF. So for every 1% daily gain in GDXJ, JNUG should gain about 2% and JDST should fall about 2%. And with a 1% decline in the GDXJ, the JNUG should fall about 2% and the JDST should gain about 2%.
The crucial detail here is that the leverage is provided on daily price movements and not on the entire price movement that you may want to take into account. Why is this important? Because if the price falls by 20% and then rises by 20%, it will not return to the original price level.
(1 – 20%) x (1 + 20%) = 96% and not 100%
The more repetitions we have and the larger the deviations from 0, the stronger this effect becomes. This means that as time passes and prices move in either direction, both leveraged ETFs will lose value over time. This is what it looks like in practice.