Shares of gold mining stocks rallied Monday — the first meaningful trading day of 2015 — while the broader market was gripped by a risk-off theme. As a result, both the nearer- and longer-term technical pictures show that the Market Vectors Gold Miners ETF (GDX) is ready to pop higher, so traders and active investors should eyeball the GDX in coming weeks.
As is the case for any financial asset, gold prices can’t find a better bottom until the bulls are washed out and gone. Up until recent months, I continued to hear the gold bugs speak loudly on any bounce in the yellow metal, despite the fact it had lost about 40% from its 2011 peak.
In many ways it is trading psychology 101 not to get involved in an asset where pundits are staunchly representing one point of view, yet it’s so easy to be tempted to dip a toe a little early.
The bullish talk around gold prices, however, has substantially died down since October, and this — coupled with the more constructive view on the charts — looks to be finally setting up a better medium-term outlook for gold prices, and in turn the gold mining stocks found in the GDX.
GDX Charts
Getting right to the multiyear weekly chart of the GDX ETF, note that in November it retested its October 2008 lows, where it bounced and has held as support thus far. From a momentum perspective, the Relative Strength Index at the bottom of the chart has been showing positive divergence versus price since its bottoming in May 2013. At the November lows, the RSI developed a higher low versus its 2013 lows.
These longer-term positive divergences take time to work themselves out, but ultimately momentum tends to win out. In this case, that would mean higher prices for the GDX in coming weeks/months.
On the daily chart below, we see that the GDX, after retesting its 2008 lows in November, bounced back up to its 50-day simple moving average (yellow line), where it found resistance and in the second half of December formed a higher low versus the November lows. The ETF then started 2015 with a bullish outside day Jan. 2 where it rallied 3%, which was followed Monday by another 2.75% rally.
As a result, the GDX has now broken more meaningfully above its 50-day SMA for the first time since last summer, and also marginally broken out of this narrowing trading range depicted by the black lines.
Active traders and investors could take the recent strength in GDX and get into a long position that, through a multiweek and possibly multimonth lens, has a defined upside target near the $22 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
