Are Miners Showing Strength, Compared To Gold?

Did something catch your attention yesterday? If so, it could have been mining stocks’ strength relative to gold. Or so it seems… until we get a closer look.

In short, the GDX ETF moved higher yesterday, even though gold moved lower. This is a sign of strength of the former, which might be viewed as something bullish. But should it be viewed as such?

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In my opinion – no. One swallow doesn’t make a summer, and a daily data outlier could be nothing more than that. Acting on gold’s daily, unconfirmed breakout, would have one buy gold at the end of the previous week. And as we’ll soon discuss, it wasn’t such a good idea after all.

So, why did miners rally?

Ultimately, it’s never possible to reply to the “why did a given market move” other than to say that “because buyers won over sellers”. It’s not particularly informative, though. The reason that seems most likely to me is that it was… a purely technical development that “needed” to happen for a formation to be complete.

This hypothesis would also explain the one odd thing that happened yesterday. Namely, while the GDX closed the day slightly higher, the GDXJ ended the day lower. This would make sense if the general stock market declined (junior mining stocks – GDXJ tend to follow its lead more than seniors – GDX) – but the point is that the general stock market ended yesterday’s session basically flat (declining by mere 0.09% decline).

Ok, so what kind of formation are miners completing?

Quite likely the head and shoulders formations. The reason for yesterday’s underperformance of the GDXJ would be the fact that in case of this ETF’s head-and-shoulders formation, the neckline is descending much more visibly. These formations are more visible on the 4-hour charts – so, let’s zoom in.

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Currently – based on yesterday’s (Mar. 29) closing prices – the formations are not yet completed, so they should be viewed as “potential”. Still, given today’s (Mar. 30) pre-market decline in gold, it seems that they will be confirmed shortly, and the entire scenario outlined above will become reality (the recent decline will have turned out to be just the right shoulder of a bearish head-and-shoulders pattern).

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Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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