GDX: Is It Time to Dip a Toe Back Into Gold Miners?

Advertisement

Gold mining stocks — as represented by the Market Vectors Gold Miners ETF (NYSEARCA:GDX) — have seen beyond lousy performance year-to-date. However, the recent price action of both gold mining stocks and gold itself might be a sign of better times ahead.

Beat the BellWith broader commodity deflation still well intact, particularly in the energy space, I am paying close attention to anything showing relative strength here. Gold mining stocks have done just that over the past few days after showing capitulatory signs for the past few weeks.

As such, active investors and traders may find interesting risk/reward opportunities in the GDX ETF on the upside.

Before looking at the charts of the GDX ETF, allow me to shed some light on the relationship or ratio of gold as represented by the SPDR Gold Shares (NYSEARCA:GLD) versus the gold miners. Note that since gold prices peaked in 2011, despite the drop in the yellow metal, GLD has dramatically outperformed the gold mining stocks.

If we apply some technical analysis on this ratio, we see that the recent outperformance of gold versus the gold miners caused a dramatic spike in the ratio that pushed it above the cone-shaped pattern. This often marks a turning point in a ratio, so we could now see the ratio come back down, which would mean outperformance of gold miners versus the price of gold.

GLD vs. GDX
Click to Enlarge

GDX ETF Charts

Moving over to the multiyear weekly chart of the GDX ETF, we see that in mid- to late July, the price fell below the late 2008 (financial crisis) lows. Volume spiked to all-time highs on the break below the black horizontal. As far as gold itself, speculative positions declined to their lowest levels since 2002.

If we take all of this together, it does look like gold and gold mining stocks saw some sort of capitulation move, which could now see a sharp snap-back higher, at least for a good bounce.

GDX weekly chart
Click to Enlarge

On the daily chart, we see that while the GDX ETF dropped sharply on July 20 on a big spike in volume, downside momentum bottomed but price continued to trickle lower into late last week. This positive divergence then resolved the stock higher Monday as it bounced sharply. On Tuesday, the ETF saw follow-through buying and managed a daily close above its 21-day simple moving average (yellow line) for the first time since May.

GDX daily chart
Click to Enlarge

Active investors could look to initiate partial long positions on a pullback to the $14 area, with a multiweek price target near $15.50-$16. Any sharp bearish reversal should be respected as a sign to get back out.

Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!

Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/gdx-etf-time-gold-miners/.

©2024 InvestorPlace Media, LLC