3 Ways to Trade the Reversal in Gold

Heading into trading on Thursday, precious metals funds like the ProShares Ultra Gold ETF (NYSE: UGL) and the DB Gold Double Long ETN (NYSE: DGP) were among the few ETFs pulling back and earning “consider buying” ratings of 8 out of 10 or more.

And given the intraday reversal in both ETFs, to say nothing of the outright gain of more than 2% in the ProShares Ultra Silver ETF (NYSE: AGQ), those “consider buying” ratings were a helpful heads-up for traders looking for even a momentary pause in the selling in this sector.

The correction in gold, which began early in the fall of 2011, is no secret to any trader or active investor. What traders of late have been focused on, however, was the potential for another bounce like the one gold and gold stocks enjoyed over the month of October – or even a quick rally like the one that took the sector higher during the week of the Thanksgiving holiday in late November.

UGL earned a major three-point upgrade heading into Thursday’s session, opening with “consider buying” ratings of 9 out ot 10. And while UGL finished lower by 1% on a close-to-close basis on Thursday, the fact that UGL began trading Thursday morning just north of $76 and ended the day over $77 suggests that buyers may be in more control than it seems on the surfaces.

Similar trading was seen in DGP. Shares of DGP earned an even larger upgrade as of Wednesday’s close, leaping from a “neutral” 5 out of 10 to a “consider buying” 9 in a single session. Opening lower on Thursday, like UGL, shares of DGP also made a strong intraday move higher, rallying by well over 1% on an open-to-close basis.

Remember that both UGL and DGP are leveraged exchange-traded funds (and notes, in the case of DGP). As such traders in these leveraged ETFs should reduce position sizes accordingly so as to avoid having larger than anticipated exposure. For example, in the instances of UGL and DGP, both of which are 2x and are built to produce twice the daily return of their underlying indexes, traders should consider using half their usual position size.

Traders who want to avoid dealing with leveraged ETFs may want to keep an eye on the non-leveraged Market Vectors Gold Miners ETF (NYSE: GDX). Although now trading in bear market territory, shares of GDX rallied by more than 2% on Thursday after opening lower. GDX has “neutral” ratings ahead of trading on Friday.

All of the exchange-traded funds in today’s report were available from research and data available through PowerRatings. To learn more, click here.

David Penn is Editor in Chief of TradingMarkets.com