Few assets have been trending higher in a more orderly fashion year-to-date than the gold mining stocks as represented by the exchange-traded fund MarketVectors Gold Miners ETF (NYSEARCA:GDX).
Not only has the up-trend in the GDX been notably well-defined but at up about 123% on the year this up-trend has also been one of the very strongest ones year-to-date across asset classes.
Through the lens of ‘trend following,’ this move higher in gold miners looks to be far from over, yet becoming complacent about trending stocks/indices/commodities or currencies is one of the surest ways to lose money.
Here’s what I currently see on the charts on how to risk-manage this new strong bull trend in the GDX ETF.
From a macro perspective, 2016 thus far has been a fairly confusing one as stocks, commodities and bonds all seem to have caught a bid simultaneously. Traditional textbook financial markets analysis often seems to hint that bonds and stocks tend to move in opposite direction, yet empirically over my 20 years in this business I have witnessed plenty of times when most assets seem to rise and fall together.
Slowing global growth has sent bond yields to record lows this year, yet commodities like oil have also rebounded sharply of their January/February lows (although oil remains in a mother of a down-trend) and equities continue to get a bid due to new their relative attractiveness versus bonds (dividend yields versus bond yields) and liquidity injections from the European Central Bank and the Bank of Japan.
So, while risk assets like stocks are rallying so too are defensive areas like bonds and gold and related assets.
Confused yet?
One of my early trading mentors at JP Morgan taught me that markets don’t always have to make sense in order for us to make money from them. If we focus on clear and well-defined trends we often time have an easier time cutting out the noise.
GDX Stock Charts
With that in mind, note that on the multiyear weekly chart, the GDX ETF’s sharp year-to-date rally has brought it back into a longer-term horizontal line of former support/resistance.
As a reference point, this area in the low $30s is thus respect-worthy as it also coincides with the relative strength index (RSI) at the bottom of the chart in record ‘overbought’ territory.
None of this is to say that the trend in the GDX cannot continue, but it may indicate that the rate of change of the rally may be about to slow through a multimonth lens.
On the daily chart, we see that the up-trend year to date has a very well-defined channel to it, which at the lower end is supported by the yellow 50-day simple moving average.
After pulling back to the lower end of the channel the week before last, last week’s rally left a strong bullish reversal candle behind on the chart and now has the GDX right back at its early July highs. From here, all else being equal the path of least resistance for the GDX ETF points higher into the $32 – $33 area as a next upside target before better resistance may again come into play.
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