Trade of the Day: GoldCorp (GG)

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It has been an interesting two months in the stock market, to say the least. The S&P 500 endured a significant pullback in early October only to have that pullback be completely subsumed by a massive recovery in late October and early November. While this recovery has been much appreciated by everyone who owns stocks, the formation that has been created by this sell-off and subsequent recovery makes us a little nervous.

To help us determine where stocks may go next, we are looking for clues from certain asset classes and their correlations.

Correlations occur in various segments of the financial markets and are represented on a basic scale from -1 to 1. A positive correlation shows that one asset tends to move in the same direction as the other, while a negative correlation shows that one asset tends to move in the opposite direction from the other.

For example, Exxon Mobil Corporation (XOM) and the iPath S&P GSCI Crude Oil Total Return (OIL) ETN have had a correlation of 0.358 during the past year. This means that watching the price of OIL can give us a clue as to whether XOM may start to experience some positive or negative price pressure moving forward. If OIL declines, it will put negative price pressure on XOM. If OIL rises, it will put positive price pressure on XOM. The two are currently diverging, but we know that falling oil prices will continue to weigh on XOM.

Similarly, Newmont Mining Corp (NEM) and the SPDR Gold Trust (ETF) (GLD) have had a correlation of 0.735 during the past year. This is a much stronger positive correlation than we saw between XOM and OIL, which means that watching the price of GLD can give us an even stronger clue as to whether NEM may start to experience some positive or negative price pressure moving forward.

Trade of the Day: GoldCorp (GG)

Daily Comparison Chart of Newmont Mining (NEM) and SPDR Gold Trust (GLD)

Unfortunately for gold bugs, the dollar has remained very strong and inflation isn’t rising. The over-leveraged gold mining sector had a little respite last week in the form of a “dead cat bounce” following the breakout on Oct. 31. But the sector is weak, the metal is still above long-term support levels, and we expect that some of the most troubled stocks over the last two years will take another dive to the downside.

We like GoldCorp Inc. (USA) (GG) for this trade because it should be independent of stocks in general. Good news or bad news for stocks could easily be seen as bad news for gold regardless. In the short-term, GG could hit its lows following the crash last month. At that point, you may want to consider a quick exit on the following put-option trade, so watch the stock carefully.

‘Buy to open’ the GG December 19 Puts (GG141220P00019000) for a maximum price of $0.95.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/trade-of-the-day-goldcorp-gg-gold/.

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