The recent spike in stock market volatility has been historic. Unfortunately many investors were caught flat-footed. The gold mining group of stocks as represented by the popular VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), however, continues to show promising signs both in absolute and relative performance terms for more upside ahead. And if that weren’t enough, one more major tailwind for this group of stocks just emerged.
Before we look at today’s trade idea in the GDX ETF, allow me to make clear that after an ultra-low volatility environment from October 2019 into mid-February 2020, we are now in an ultra high volatility environment.
From a risk management perspective this to me means reducing ‘trading’ position size, widening stops, and generally giving positions more breathing room.
As such, the trade idea in the gold mining ETF is not meant to give immediate gratification, but rather should be looked at through a multi-week and multi-month lens in terms of its duration.
GDX Stock Charts
A look at the multi-year weekly chart shows that GDX (blue line), after breaking out in the summer of 2019, began to consolidate the rally as of September 2019.
This multi-month sideways consolidation move, which is taking place in a wide trading range, continues to be in place. However, the bigger picture buying pressure remains intact so far as the price of gold is also in a good spot to move higher.
Over the past few days the price of oil collapsed (green line on the chart), which is a new and potentially important tailwind for gold mining stocks like GDX.
What is the connection between the price of oil and gold miners? Oil is one of the major input costs that mining companies need. Thus, a drop in the price of oil is a tailwind for miners as the lower input cost should boost the profit margins.
Although the correlation between the price of gold and gold miners isn’t perfect, it does tend to be positive. On this next chart note the relative breakout that the price of gold had versus the U.S stock market. This relative strength of gold should ultimately also trickle over to gold mining stocks, all else being equal.
Finally, on the daily chart we see that the GDX ETF remains in a multi-month trading range. Gold miners over the past two weeks have been volatile and traded marginally lower.
In my eye, there are two reasons for this. One is the potential credit risk that some gold miners are falling under. And two, as traders and investors get margin calls or are otherwise forced to liquidate positions, they are using their gold and related positions as a source of liquidity.
Given the aforementioned tailwinds that gold and gold miners currently enjoy, I don’t foresee either of these two issues persisting very long.
Trading the GDX ETF
The GDX ETF also often displays a high probability candlestick pattern for entry points. I will discuss this pattern in a special webinar this Thursday, March 12. Register here.
Note that over the past two weeks the GDX ETF once again meandered to the low end of its multi-month trading range. In my opinion this is a better reward-to-risk buy.
Active investors and traders could look to buy GDX in the $26 – $27 area with a next upside profit target at $30 and ultimately upon a breakout, (if and when) a second profit target around $35 could open up. As a stop loss any weekly close below the $26 could be used.
Learn the highest probability candlestick pattern in Serge’s webinar. Register here.
