Gold Miners: Why Apparent Strength Is Just A Facade

Despite everyone saying the bottom is in, and that gold and miners are set for takeoff, the signs still point south. The real question: how low can they go?

Let’s take a look at some price targets for where the GDX and GDXJ mining ETFs might land up.

With the miners attempting to reclaim Pride Rock, it won’t be long until the GDX ETF is singing Hakuna Matata.

Rising U.S. Treasury yields? No problem.

A reinvigorated USD Index? Who cares.

But while strength is often viewed through the eyes of the beholder, the GDX ETF is far from being The Lion King. Sure, its bravery in the face of familiar foes is a reason for optimism. However, we’ve seen this movie before. While the recent rally may resemble Mufasa, beneath the surface, the GDX ETF’s tepid price action looks a lot like Simba.

If you analyze the chart below, you can see that the GDX ETF moved to the upper level of my initial target range. However, with the Mar. 19 close eliciting a sell signal from the stochastic oscillator (the black and red lines at the bottom section of the chart), a historical reenactment (repeat of the early-2021 performance) could deliver another sharp move lower.

ChartDescription automatically generated

In addition, the shape of the early-January swoon is eerily similar to today’s price action. Case in point: back in January, the GDX ETF enjoyed a material daily rally, consolidated, then sunk like a stone. Because of that, the recent move higher and a few days of back-and-forth trading (consolidation) is nothing to write home about.

To explain, I wrote on Mar. 18:

Mining stocks followed gold higher, and they moved to the upper part of my previous target area, but not yet to its upper border. As you may recall, I mentioned the possibility of GDX moving to the $34 - $35 area and my original target for this rally was slightly below $34.

The GDX ETF now encountered the strongest combination of resistance areas, while the Stochastic indicator moved above the 80-level. Technically, the situation is now much more bearish in the GDX ETF chart than it was at the beginning of the year. Back in January, the GDX ETF was only at the declining blue resistance line.

Now, in addition to being very close to the above-mentioned line, it’s also at:

  • The neck level of the previously broken broad head and shoulders pattern
  • The 50-day moving average
  • The previous (late-February) highs.

Consequently, it’s highly likely that we’ve either just seen a top or one is close at hand.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, while the S&P 500 is a key variable in the equation, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market):

  1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
  2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
  3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: the interim downside target is based on the assumption of a steady S&P 500. If the stock market plunges, all bets are off. For context, when the S&P 500 plunged in March 2020, the GDX ETF fell below $17, and it took less than two weeks for it to move as low from $29.67. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

If gold forms an interim bottom close to $1,600, this could also trigger a corrective upswing in the mining stocks, but it’s too early to say for sure whether that’s going to be the case or not.

Also supporting the potential move, the GDX ETF’s head and shoulders pattern – marked by the shaded green boxes above – signals further weakness ahead.

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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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Flat Broke 3 weeks ago Member's comment

Lol, so in a nut shell, don't be long miners!

Przemyslaw Radomski, CFA 3 weeks ago Author's comment

Yes, well, that's a quite short way to put it, but in general that's my opinion on the current situation in this part of the precious metals market.