Gold Stocks Break Out

The gold miners’ stocks entered this young new year with a bang, as their leading index surged to a major breakout above multiple key resistance lines. That really strengthens the technical case that gold stocks’ next bull-market upleg is underway. This sector has been carving a textbook-perfect series of higher lows and higher highs since late November now, forming a young upleg. Those usually mature to massive gains.

The leading and dominant gold-stock benchmark and the trading vehicle is the GDX VanEck Vectors Gold Miners ETF. As of the middle of this week, GDX commanded nearly 2/3rds of all the capital deployed in gold stocks through all the American gold-stock ETFs! GDX is traders’ go-to destination when looking for gold-stock-sector portfolio exposure. And its popularity is growing after last summer’s magnificent upleg.

After getting sucked into March’s COVID-19-lockdown stock panic with gold, GDX skyrocketed 134.1% higher over the next 4.8 months! But after shooting parabolic, the major gold stocks held by GDX were extremely overbought. So a normal healthy correction was in order to rebalance way-overextended technicals and sentiment. That started in early August and ultimately proved cunning in its price action.

Bull markets are an alternating series of uplegs followed by corrections oscillating around a long-term uptrend. Every two steps forward are followed by one step back. That corrective phase is necessary to bleed off excessive greed from preceding upleg toppings.  Corrections’ mission is to annihilate bullish psychology, which is accomplished by toying with bullish traders to convince them to stay fully deployed.

So during most corrections, strong countertrend rallies disguise their true nature. Traders wearing rose-tinted glasses are deceived into believing a correction isn’t happening or it has largely passed quickly with minor losses. They then ride it most of the way down maximizing their financial pain. The best defense against being duped by a correction is maintaining perspective, which comes from studying past ones.

All this is important because gold stocks’ major breakout this week pretty much formally staked their recent correction. Until that happened, this sector had remained trapped in its correction downtrend despite GDX’s solid gains since late November. This chart looks at the gold-stock-bull technicals over the last couple of years through that GDX lens. This week’s gold-stock developments are a major milestone.

The significance of this week’s GDX major upside breakout is most apparent within the context of its preceding correction.GDX’s last upleg peaked at $44.48 in early August, again after more than doubling in a matter of months. The initial selloff was hard and fast, GDX reversed violently to plunge 12.2% in just four trading days. I warned about that new correction soon after while analyzing gold miners’ quarterly results.

Technically a correction is a 10%+ selloff after an upleg, so there was no disputing one was underway. But GDX bounced sharply after that quick initial plunge, surging 9.9% higher in the next four trading days. So by mid-August, GDX was back to just 3.5% under its 7.5-year secular high seen less than two weeks earlier. So traders not sufficiently hardened by experiencing past gold-stock corrections figured it was over.

The GDX price action over the next several weeks certainly fostered that view. Rather than selling off, GDX was consolidating high. Consolidations accomplish the same sentiment and technical rebalancing as corrections but take much longer to do so. Higher price levels after shallower selloffs enable greed to fester for extended durations. There’s always a tradeoff between selloffs’ depths and their longevities.

After trading gold-stock upleg-correction cycles for decades, I didn’t believe this latest correction was over yet in early September. I explained this in an essay then called Gold-Stock Correction Mode, which sure wasn’t popular with duped traders. One key reason was GDX had still only sold off 12.2% at worst, which was far too mild for a gold-stock correction. This bull’s previous three averaged way-more-serious 36.5% losses!

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Mad About Money 2 weeks ago Member's comment

Not great timing given the recent price action.