Are the Mining Shares Topping?

Yesterday, I wrote about the stock market topping. The retirement account funding deadline was April 18 and all that money was invested in one last hurrah Tuesday as the SPX tagged 2104, just 30 points shy of its May 2015 record. The same can be said for the mining shares as GDX soared from Monday’s closing 22.18 all the way up to 23.47 before backing off late in the day.

GDX has showed TSI and OBV failure along with money flow problems extant in the SPX and SPY on this last three day rally. GDX has also formed an IMP with a double top. The SPX, in late 2013 into early 2014, formed an IMP with a double top. IMP stands for Irregular Megaphone Pattern and is shown in the GDX chart below.

After forming two touch points (GDX 18.81 and 18.85) in a gradual rise, the IMP starts to rise at a steeper angle before coming back to just shy of the rising bottoms line formed by the two previous touch points (19.02). Thus begins a steep rise (23.06), then a shallow sell-off (21.30) followed by a higher high (23.47). Once the second higher high is formed, the market falls suddenly and sharply to just below the first touch point (18.81) completing the IMP. This pattern is a bullish pattern, so I expect higher highs ahead for the mining sector once the IMP is completed.

Gold shows an a-b-c type drop from its March high (I will post a chart on this tomorrow). The Elliott Wave rule called the Equality of Waves Rule regarding a-b-c waves is that waves ‘a’ and ‘c’ would tend to equal in time, price or both. Wave (a) was 13 trading days long, so we might expect wave (c) to be 13 trading days long since it is obvious that wave (c) is going to be longer in price. Wave (c) itself is an a-b-c wave and wave ‘b’ of that wave failed to make a new high when GDX, in fact, did. In fact, the top of wave (b) brought GDX to a new recovery high also.  This is a case of inter market divergence.

My best guess is the mining sector had been relatively undervalued compared to the price of gold, so it has been playing catch-up. Also, my best guess is that the precious metals sector will continue to shine into mid June as the stock market goes through a choppy topping pattern with a slight bias to the down side.