Market Vectors Gold Miners ETF: GDX Is Due for a Nap

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It’s no secret that gold and gold mining stocks have had a good run year-to-date. To put the magnitude of this rally into some perspective, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) is higher by just about 65% so far in 2016.

Beat the Bell: Market Vectors Gold Miners ETF (NYSEARCA:GDX)While I think this move has further to run in the intermediate term, in the near-term, the move looks to be be overly stretched and due for a pullback.

At least a good part of this surge in gold and gold mining stocks can be attributed to the slump in the U.S. dollar since late last year, which brings me to the first chart.

GDX Charts

On the chart below, I plotted the PowerShares DB US Dollar Index Bullish (UUP) in red versus the GDX in blue. While the inverse correlation is not always as clearly noticeable as it has been for the past few months, it usually is there at least to some extent.

We see that after initially diverging again last October, the two funds mean-reverted in February before the next divergence took place, which saw the dollar slump again and gold mining stocks extend their rally.

GDX UUP
Click to Enlarge

Moving on to the multiyear weekly chart, we see that the sharp rally in the GDX ETF pushed it out of a multiyear downtrending channel as marked by the black lines, and also back above its blue-100 week simple moving average for the first time since 2011. As s a result, the MACD momentum oscillator has now reached overbought readings last seen near the 2011 highs.

GDX weekly chart
Click to Enlarge

To be clear, I don’t want to fight this rally trend in gold and gold mining stocks too much, but when mean-reversion opportunities set up, I am very keen to pounce on them for cash flow.

Finally, on the daily chart, note that the GDX over the past few sessions showed some exhaustive candles, particularly on April 20th when a failed intraday rally led to a daily closed right near the lows of the day. This was followed last Friday by another failed intraday rally and a close very near the daily lows.

While the GDX last Friday still held above its blue eight-day simple moving average, the selling pressure in GDX in recent days almost perfectly coincided with new dollar strength.

GDX daily chart
Click to Enlarge

Particularly, should the dollar continue to lift, then the GDX could mean-revert into the low $20s rather quickly, which would also satisfy a move back to the yellow 21-day moving average.

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