Is There a Bullish Breakout for the Gold Miners ETF – GDX?

Gold mining stocks and the gold mining sector as a whole have been in free fall mode since September 2012. The Market Vectors Gold Miners ETF (GDX) is still trading 55% below its peak, but it is showing signs of life. Is this a bullish break out?

The March 6, iSPYETF article on ‘Gold vs GDX’ mercilessly ousted the fundamental profit making flaws of the gold mining sector.

To say that gold mining stocks have had a hard time monetizing their mining activity in an environment of falling gold prices is like claiming hurricane Sandy was just a stiff breeze.

The Market Vectors Gold Miners ETF (GDX) lost 60.8% from top to bottom tick, but if there’s anything we’ve learned from QE is that what comes down likely goes back up.

Based solely on technical analysis, GDX just completed the first steps of a bullish breakout.

The May 20 low has three trademarks of a tradable bottom.

  • It sports a bullish RSI divergence where price dropped to a new low, but RSI did not.
  • Prices were able to close above the black parallel channel that confined much of the previous down trend.
  • Thursday’s pop canceled a bearish percentR low-risk entry. percentR (or Williams %R) is a momentum indicator. According to my personal methodology (which is correct about 60 – 70% of the time) the immediate down trend is now broken.

It obviously will take more confirmation for the fledgling breakout to ‘stick,’ but the above-mentioned bullish factors decrease the odds of being cut by trying to catch a falling knife.

A close above the first red resistance line at 31.27 will be further confirmation that a tradeable low is in while key support is located right around 27. Use illustrated support/resistance levels to spot low-risk entries.

Low-risk entries are not no-risk entries. But going long against support, or once resistance is broken (and then used as support and foundation for a stop-loss level), significantly limits your risk and lets you know exactly when you’re wrong.

Currently prices are 5%+ away from support or resistance. Using support at 27 as stop-loss, the risk (drop from 29.40 to 27) is 8.2%. It makes sense for prices to pull back or resistance to be taken out for a lower risk entry.

The Profit Radar Report specializes in pinpointing low-risk entries for the S&P 500, Nasdaq-100, euro, dollar, gold, silver and 30-year Treasuries. There’s always an opportunity somewhere, and the Profit Radar Report helps you find it.

Weekly ETF SPY: Gold Miners (GDX)

Anytime a stock or ETF drops 50% in a short period of time, it’s tempting to bet on a bounce. Such a bounce may be forthcoming for GDX, but to avoid being cut by the proverbial falling knife, it’s prudent to wait for a move above resistance.

If you think gold’s performance has been disappointing, look at gold miners.That’ll cheer you up (assuming you don’t own gold mining stocks).

The Market Vectors Gold Miners ETF (GDX) tumbled over 50% since its September 2012 all-time high. Is there enough ‘blood in the streets’ to buy GDX?

My March 6 comparison between gold and GDX mercilessly ousted fundamental profit making flaws of the gold mining sector. Today’s article will look at the technical picture. Could the steep decline be a buying opportunity?

After a 50% haircut, trend following technicals are obviously pointing lower and fishing for a bottom here is like catching the proverbial falling knife.

However, based on RSI, the selling intensity is subsiding and GDX has reached the bottom of a trend channel that contained the last leg lower. This could halt or stop the bleeding.

Where the final low will be remains to be seen, but going long with a stop-loss just beneath channel support or after GDX drops below channel support and closes back above would be a low-risk opportunity for aggressive investors looking for a favorable risk/reward trade.

Low-risk doesn’t mean no risk. There is risk, but it’s well defined by the trend channel.

Longer-term, the GDX meltdown provides fertile soil for a buying opportunity. But conservative investors should wait for the ‘seed to sprout’ before buying.

A break above resistance would be the first signal that the green shoot is ready to mature further. GDX resistance is provided by the red lines and black parallel channel.

A move above the trend channel will be more meaningful, but even breaking above red line resistance can be used as a buy trigger with a stop-loss just below the trend line (or parallel channel).

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Gold vs GDX – Is The Price Divergence Bullish or Bearish?

The precious metals sector is one of the worst performers of the year with gold mining stocks losing three times as much as gold prices. Why did gold miners get hit so hard and can this be bullish going forward?

Gold mining stocks represented by the Market Vectors Gold Miners ETF (GDX) have lost 35% since September last year. Over the same period of time gold prices have shed ‘only’ 13%. Is the GDX decline bullish for gold?

Gold Mining Basics & Disadvantages

Gold mining (and mining in general) is a tough business for several reasons. The mining business is capital intensive. It takes expensive equipment to replace ‘inventory.’

In fact, the goal and business model of every mining company is to sell the most valuable asset on its balance sheet. It’s hard to create consistent value that way.

Unlike brewers (think of your favorite beer) for example, miners don’t get any excess return from branding. It’s not that gold mined by Barrick Gold fetches more than gold mined by Newmont. Gold is gold and commodities are anonymous.

No Progress in the Best Environment Ever

Gold miners have enjoyed the best possible environment for mining and selling gold. Political and financial uncertainty have sent gold prices soaring from $250 to well over $1,500/oz, but Barrick Gold shares trade at their 1996 level today and shares of Newmont Mining (NEM) are at the same level as in 1987.

Barrick Gold and Newmont Mining are well-managed companies. They are industry titans and combined account for over 20% of the Market Vectors Gold Miners ETF (GDX), but … mining just is a tough sector to create shareholder value in.

The first chart illustrates gold miners’ struggle to keep up with gold prices. Newmont Mining is trading below its 1997 peak. Gold prices on the other hand have soared more than 600% since the early 1990s.

Obviously, it is possible to make money with miners. From 1998 (or 2000) – 2011 Newmont Mining shares gained over 460%. However, it took a frenzy drop into the 1998 low and a frenzy rally to the 2011 high to deliver such handsome gains.

Short-Term Gold/GDX Correlation

The second chart below plots the percentage change of gold prices since the September 2011 high against the percentage change of GDX.

Again, GDX has been hit much harder. Gold is down 17%, GDX lost 37%.

Is that performance discrepancy bullish or bearish for gold prices and GDX?

Now is not the time to join the sell gold/GDX crowd. The decline accelerated back on February 10, when the Profit Radar Report predicted that: “A break for gold below 1,663 will result in a move to 1,635, and a drop to at least 1,620 – 1,600 would be welcome to shake out some of the weak bulls.”

Much of the damage has already been done and the recent drop no doubt spooked goldbugs. It also catapulted many fair weather gold ETF investors (SPDR Gold SharesGLD and iShares Gold Trust – IAU) investors back to the sidelines.

I would view a more deliberate test of gold support around 1,530 accompanied by a bullish RSI divergence as a buy signal (with a stop-loss below support).