Play the Shifting Momentum in Gold Miners

by Tyler Craig | June 5, 2013 6:30 am

Gold miners suffered an epic beating in recent months as they were caught up in the frenzied liquidation of all things related to gold and silver. From its 2011 peak of $67, the Market Vectors Gold Miners ETF (GDX[1]) has fallen a harrowing 55%, dashing the hopes of its shareholders in the process. While there have been a few rebound attempts rewarding nimble buyers, GDX has thus far been unable to escape the bearish onslaught.

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And yet, a few promising signs have formed during the past month, hinting at the potential for at least a short-term tradable bottom in the beleaguered mining ETF. While some work remains before a full-fledged trend reversal can take place, these developments at least signal the bulls are starting to establish a foothold.

Although picking tops and bottoms is often a fool’s errand, technicians can use measures of momentum to better assess the likelihood of a trend reversal. One of the more popular indicators used to assess whether a trend is strengthening or weakening is the Relative Strength Index (RSI).

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As shown in the accompanying chart, the latest downswing and formation of a lower pivot low in the price of GDX was not confirmed by a lower swing low in the RSI. On the contrary, the RSI formed a higher swing low — otherwise known as a bullish divergence, which suggests the momentum of the downtrend in GDX is slowing.

Alongside the downtrend in price, the RSI has remained firmly entrenched in bear territory between 55 and 20. All prior attempts to climb back above the 55 resistance zone have been soundly rejected. If GDX can stage a strong enough advance to lift the RSI above this level, the bulls will have yet another piece of evidence supporting their cause.

Further buttressing the bullish case is the recent pattern in volume. High-volume up days have been a rare commodity during the relentless slide in miners, but appear to be making a comeback. In the back half of May we saw no less than four different accumulation days.

If GDX can vault above near-term resistance at $31, bullish plays maybe worth a shot. One of the more appealing, higher-probability strategies worth consideration is selling the July 27 put for a 69-cent credit. Think of it as a bet that GDX will remain above $27 by July expiration — which it certainly should if this is a legitimate bottom forming here.

The max reward is limited to the initial credit received. To limit the risk, you could exit if GDX breaks its May low at $26.25.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. GDX:

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