Gold Stocks Wavering

The gold miners’ stocks are wavering, frustrating traders. For the better part of a half-year, this sector has neither broken out nor broken down. Instead, it has mostly ground sideways since the last upleg’s peak. Gold stocks being mired in a consolidation so long, even a relatively-high one, is steadily eroding bullish sentiment. That ups the odds it will roll over into a correction, especially considering gold’s situation.

Last summer the gold stocks were rocking, with the leading GDX VanEck Vectors Gold Miners ETF just soaring. Following gold’s decisive bull-market breakout to its first new highs in several years in late June, GDX blasted 29.0% higher over the next 2.5 months! That generated great bullishness, capping a larger 76.2% upleg over 11.8 months. The major gold stocks dominating GDX were becoming belles of the ball.

That fast run left them super-overbought, so a correction was highly probable to rebalance sentiment in this hot sector. And that indeed looked to be getting underway, with GDX retreating 15.4% over the next 1.3 months into mid-October. The gold stocks mostly bumped along those correction lows for another 1.3 months into late November. Then GDX rallied a bit but kept grinding sideways on balance for most of December.

But on Christmas Eve’s throwaway half-day trading session, gold surged in a surprising rally managing to break out above its own downtrend resistance. GDX surged 6.2% in just 4 trading days, rekindling hopes the gold stocks were off to the races again. But despite gold’s sharp geopolitical rally this month, the gold stocks haven’t been able to break out to new highs. This week GDX fell back to pre-Christmas-Eve levels.

Thus for 4.4 months now, the major gold stocks have effectively drifted. They failed to roll over into a real correction, then failed to break out to new highs even while gold was. This lackluster action reminds me of Jesus Christ admonishing a church in Asia Minor as described in Revelation. He warned the church in Laodicea, “I know your deeds, that you are neither cold nor hot. I wish you were either one or the other!”

“So, because you are lukewarm - neither hot nor cold - I am about to spit you out of my mouth.”That sounds like gold stocks in recent months. If they were cold after correcting, they’d be great buys. If they were hot after breaking out to new highs, momentum fueled by resurgent bullish sentiment could push them higher. But instead, they’ve been lukewarm, the most unappealing temperature for food, drink, or trading.

There’s no doubt they were hot in early September as this sector’s last upleg peaked. GDX stretched more than 34% above its baseline 200-day moving average, revealing extreme overboughtness. That was the most overextended gold stocks had been since late August 2016. And that sure didn’t end well, with GDX soon plummeting 39.4% in 4.4 months in a brutal severe correction! Those exist for a reason.

After major uplegs, popular sentiment grows too bullish. That entices in all speculators and investors who are interested in buying in the near term. Once they are effectively all-in, the capital inflows necessary to force gold stocks higher dry up. All traders can do is sell, and that soon starts to snowball. The ultimate purpose of corrections is to rebalance sentiment, eradicating greed and rekindling fear through big selloffs.

Those are the most efficient and fastest way to bleed off upleg-killing levels of greed. But there’s another way that is much slower. Instead of selling off sharply igniting fear, gold stocks can grind sideways after uplegs in high consolidations. That increasingly leads to apathy, which gradually drowns out greed after uplegs peak. The critical question for traders now is whether gold stocks are correcting or consolidating.

The trading strategies for each possibility are very different. Corrections exhibit severe downside in this volatile sector. So traders need to sell positions or at least ratchet up trailing stop losses to protect their gains. Cash is king in corrections since it preserves capital while gold stocks sell off enabling traders to buy back in at much-lower prices increasing their position sizes. Gold-stock losses in corrections can get huge.

As this chart of recent years’ GDX action shows, this gold-stock bull’s prior two corrections averaged ugly 35.4% losses over 11.8 months!So traders sure don’t want to own gold stocks during a correction. GDX is rendered in blue here, with this gold-stock bull’s major uplegs and corrections noted. GDX’s 15.4% loss at worst over 1.3 months since the last upleg peaked is certainly not a correction-grade selloff in this sector.

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