This
young gold-stock upleg is accelerating, with fast-rising prices
enticing in more capital. This sector has surged sharply to
multiple major upside breakouts in recent weeks, which is starting
to turn skeptics into believers. Despite their strong upside
momentum being chased, gold-stock prices remain far from overbought
levels warning of impending selloffs. This mounting upleg still has
great room to power way higher.
Gold
miners’ earnings are highly leveraged to prevailing gold prices,
which drive this sector’s upleg and correction cycles. In early
March as the last extended gold-stock correction was bottoming, I
wrote an essay on
gold’s momentum selloff. It concluded with “the gold-futures
selling that ignited all this is finite, and is likely nearing
exhaustion. After that, gold should rally hard.” We were
positioned for a new upleg.
At
that major bottoming, the trading books in our newsletters were full
of fundamentally-superior gold miners’ stocks. We added and
recommended them leading into that at low prices, when they
were deeply out of favor. A few weeks later, I wrote another essay
analyzing the
latest quarterly results from the mid-tier gold miners. They
are in the sweet spot for stock-price appreciation potential when
gold powers higher.
Still out of favor, they had just reported one of their best
quarters ever. Their production growth was way better than
their larger peers’. And thanks to the still-high prevailing gold
prices despite its last correction lingering, these elite gold
miners reported record revenues, earnings, operating cash flows, and
cash treasuries! Their fundamentals are outstandingly-bullish yet
their stock prices continued to mostly languish.
But
the gold stocks were stealthily climbing on balance, as evident in
their leading benchmark the GDX VanEck Vectors Gold Miners ETF. A
couple weeks later in still-another essay, I explained why
another
gold-stock upleg was underway. GDX had poked its head above its
correction-downtrend resistance and its 50-day moving average. And
its technical performance since bottoming looked very
young-upleg-like.
My
young-upleg thesis advanced in early April was met with a lot of
skepticism and even hostility. From the feedback I got, it seemed
like most traders were convinced the gold stocks still needed to
drop much lower before a new upleg could get underway. Sentiment
staying bearish is typical after any bottoming, as traders
extrapolate recent conditions out into the indefinite future. Their
festering doubt was a bullish sign.
And
that contrarian new-upleg-growing analysis has since been vindicated
in spades. In the past couple weeks, GDX has blasted sharply higher
cementing its strong uptrend. Naturally this accelerating
gold-stock upleg is working wonders for sector psychology,
attracting traders back to this battered sector to chase those
mounting gains. That has shifted the tenor of what I’m hearing from
speculators and investors.
A
couple weeks ago, that was mostly “Adam you are wrong, the
gold-stock correction is very much alive and well and will pummel
this sector much lower.” Few were bullish like they should’ve been
when gold-stock prices were considerably lower. Now I’m largely
getting “Did I miss this gold-stock move, is a selloff looming?”
After such big-and-fast gains, traders fear this sector will soon
roll over again into another selloff.
This
latest GDX chart shows the recent blistering gold-stock surge, which
decisively broke out above both this leading sector benchmark’s
correction-downtrend resistance and 50dma. But despite rallying
sharply, the gold stocks remain relatively-low. While they
may be short-term overbought, they have a long ways to run until
they get overheated enough to threaten this upleg. It still looks
young technically, a bullish omen.
Bull
markets power higher in a series of alternating uplegs followed by
corrections. While the latter sure aren’t fun for traders not
prepared for them, they are very important for bulls’ longevity.
They are utterly essential for rebalancing sentiment,
eradicating the excessive popular greed that flares late in major
bull uplegs. That ensures the bull doesn’t burn out prematurely,
sucking in too much future buying too soon.
By
early March, GDX had corrected 30.5% in 6.8 months. That was
necessary after this dominant gold-stock ETF had skyrocketed 134.1%
higher in just 4.8 months out of last March’s stock panic! Such
big-and-fast gains fueled extreme greed, which had to be bled away
before this bull market could continue higher again. That upleg
also left gold stocks extremely overbought, justifying a
bigger and longer correction.
Its
downtrend is readily apparent in this chart. Despite normal sharp
countertrend rallies periodically, gold-stock prices generally kept
grinding lower on balance. It looked like gold’s own driving
correction had matured in late November,
green-lighting a
new upleg for gold stocks. And indeed GDX surged up 15.2% in
1.3 months straddling December. But unfortunately that young upleg
was soon prematurely slain.
Gold
was hammered by
heavy momentum selling in both gold futures and gold-ETF
shares. That fed on itself in a vicious circle, with lower gold
prices sparking more selling leading to still-lower gold prices.
The gold stocks and thus GDX had no choice but to be dragged
lower with gold. That left this sector super-cheap relative to
prevailing gold prices, with
gold-miner
valuations really low. They were truly screaming buys.
Technically a correction is a series of lower highs and lower lows.
But those downtrends are punctuated by sharp countertrend rallies,
which trick traders into staying deployed throughout those
selloffs. These intra-correction surges are short-lived though,
tending to last for a few weeks at most before they roll over
into new lower lows. A good example of these deceptive surges
happened leading into early November.
In
just seven trading days, GDX rocketed 13.4% higher and broke out
above its downtrend resistance. But that false breakout quickly
failed, sending this ETF plunging back down 19.3% over the
subsequent couple weeks or so to a deep new correction low. If this
latest gold-stock rally since early March looked more like that,
much shorter and sharper, caution would be warranted. But instead
it is more upleg-like.
As
of the middle of this week, GDX had powered 19.2% higher over 1.7
months or seven weeks! This kind of move off a major low is too
big and too long to be a countertrend rally within a correction. It
looks like the real deal technically, a mounting young upleg carving
a beautiful series of higher lows and higher highs. This ETF’s
major decisive breakouts above both its correction resistance and
50dma cement that.
Gold-stock prices’ upside momentum is accelerating, which is normal
as herd psychology shifts. Back surrounding early March’s bottoming
when gold stocks were much cheaper, the momentum traders didn’t
believe a new upleg was increasingly probable. But GDX’s hard
bounce since then has shattered their doubts, so they are rushing to
redeploy and chase these big gains. This crucial upleg dynamic is
self-feeding.
The
more gold stocks climb on balance, the more traders want to buy
them. The more capital they deploy in this sector, the higher gold
stocks rally. That builds bullish sector sentiment, attracting
still more traders to perpetuate this virtuous circle. Despite
their sharp surge in recent weeks, gold stocks are scaling the
proverbial wall of worry. Hence all the concern out there that gold
stocks are overbought and need to sell off.
That
may be true over the short-term, as bull-market uplegs naturally
flow and ebb. They take two steps forward in surges, before
retreating one step in healthy pullbacks. These alternating swings
within uplegs also keep sentiment balanced, extending their
lifespans. But there is no reason to worry that this entire young
upleg is ready to fail and give up its ghost. It remains too small,
too short, and far from overbought enough.
This
secular gold-stock bull born back in January 2016 has already seen
four previous uplegs. In GDX terms, they averaged massive 99.2%
gains over 7.6 months each! Doublings are par for the course in
this volatile high-potential sector, which is why contrarians put up
with the serious corrections between these mighty uplegs. Climbing
merely 19.2% so far over just 1.7 months, this upleg is nowhere near
mature.
The
fact traders are even worried about that proves this upleg
remains young! Late in major gold-stock uplegs, herd sentiment
is convinced gold stocks will rocket to the moon. Greed grows so
extreme after typical huge upleg gains no one but the most-hardened
contrarians even think major selloffs are possible let alone
likely. So rejoice when you read bearish gold-stock commentary, as
that doesn’t exist near toppings!
Another major reason this young gold-stock upleg is far from ending
is GDX actually remains somewhat oversold even after recent
weeks’ sharp surge! There’s a great indicator that quantifies
overboughtness and oversoldness, or how fast and far prices have
moved. It looks at GDX as a multiple of its underlying 200-day
moving average. This is based on my
Relativity
Trading system, which has proven super-profitable.
Dividing GDX’s closing price by its 200dma every day and charting
these results over time reveals when this sector gets overbought or
oversold. I call this multiple the Relative GDX, or rGDX for
short. Within ongoing secular bulls, it tends to form horizontal
trading ranges. After major uplegs, gold-stock prices tend to
peak near certain rGDX levels. And after major corrections, they
tend to bottom around other ones.
This
rGDX chart effectively normalizes gold-stock price action over the
last couple years or so, rendering it in perfectly-comparable
percentage terms off GDX’s baseline 200dma. The black 200dma is
flattened to 1.00x, and GDX prices are expressed in percentages
relative to it in the red line. An rGDX read of 1.10x for instance
shows GDX is 10% above its 200dma, while 0.90x indicates this ETF is
trading 10% under it.
Relativity trading ranges are based off the last five calendar years
of data, and GDX’s from 2016 to 2020 encompassing this bull ran from
0.80x on the low side to 1.50x on the high side. Nearing and
crossing that lower rGDX support zone, gold stocks are extremely
oversold. After GDX has plunged far enough and fast enough to near
80% of its 200dma, odds are a major correction has run its course
and is bottoming.
In
early March when GDX’s recent extended correction ended, the rGDX
closed at just 0.825x. While the actual bottoming day and level
wasn’t knowable in real-time, such extremely-low rGDX reads greatly
upped the odds that selloff was climaxing. That’s one reason I was
pounding the table on buying dirt-cheap gold stocks then, when few
others were bullish. We filled our newsletters with great
gold-stock trades.
Conversely major-gold-stock-upleg toppings during this bull have
happened at extremely-high rGDX reads up near 1.50x. GDX
skyrocketed 151.2% higher in this gold-stock bull’s maiden upleg
into mid-2016. That failed at extreme-overbought levels with the
rGDX running way up at 1.567x. And when GDX shot 134.1% higher into
last August, that latest gold-stock upleg died as the rGDX soared
back up to 1.448x.
So
upleg-slaying levels of overboughtness aren’t baked in until GDX
soars high enough fast enough to catapult it about 50% above its
200-day moving average. Today we aren’t even close! As of this
leading sector ETF’s $36.83 mid-week close, the highest GDX had been
relative to its 200dma was only 0.988x. Anything under 1.00x
technically remains oversold within this indicator’s longer-term
upleg-correction context.
With
GDX still under its 200dma, there is virtually no risk this young
gold-stock upleg will soon fail. Heck, that prematurely-killed
earlier upleg straddling December drove the rGDX to 1.055x. With
GDX’s 200dma now running at $37.28, to stretch way up to a risky
extremely-overbought 1.50x rGDX read would require GDX to soar to
$55.92! That would extend its total upleg since early March to
81.0%, closer to precedent.
Since greedy euphoric upleg toppings can propel gold-stock prices
higher than most expect, I don’t sell outright in them. Instead I
ratchet up the trailing-stop-loss percentages on our open
trades as gold stocks get more overbought. That way we can ride the
uplegs as long as possible, maximizing our big gains from buying low
around correction bottomings. And the sell decisions are
mechanical, eliminating emotions.
With
gold stocks so darned volatile, we start with very-loose 25%
trailing stops when adding new trades. After major corrections
mature and GDX gets extremely oversold, gold stocks are very
unlikely to keep plunging. So those loose stops are like
catastrophe insurance. But as uplegs mature, I start raising those
trailing stops to 20%, 15%, 10%, and sometimes a tight 5%. That
whole process is governed by the rGDX.
A
neutral GDX trades at its 200dma, while an extremely-overbought one
stretches 50% above it. So once the rGDX trades about 2/3rds up
into that overbought area, I start preparing for a topping. I
round that up to a 1.35x rGDX read. When gold stocks surge fast
enough and high enough to push GDX 35% over its 200dma, it’s time to
start getting wary and gradually tightening stops. Today that works
out to a $50.33 GDX.
That
is still another 36.7% higher from this week’s prices, way up there
from here! It is pointless to worry about upleg-slaying levels of
overboughtness until this GDX sector benchmark at least hits that
1.35x point. And these GDX targets are conservative, since its
200-day moving average climbs paralleling maturing gold-stock
uplegs. 1.35x and 1.50x whatever GDX’s 200dma is a few months from
now will be higher.
So
despite this accelerating gold-stock upleg generating increasing
interest, this move is nowhere near overbought in broader cycles
terms. While gold stocks may pull back modestly for a few days
after such a sharp surge, that is normal intra-upleg behavior.
Uplegs gradually meander higher in uptrends, carving series of
higher lows and higher highs. This one has a long ways to march yet
before overboughtness nears.
Thus
I reiterate what I wrote a couple weeks ago arguing that
another
gold-stock upleg was underway when GDX was 5.7% lower. If you
are not sufficiently deployed in fundamentally-superior gold stocks
to ride this sector’s next major upleg, the window to buy in
relatively-low is increasingly closing. The biggest gains are won
by those brave enough to buy in the earliest, before gold stocks get
popular and greed flares.
While it wasn’t easy psychologically, we gradually filled up the
trading books in our newsletters into and after GDX’s March 1st
correction bottoming. Now our weekly and monthly respectively have
twenty and ten open gold-stock and silver-stock trades. These
hand-picked fundamentally-superior companies offering excellent
production-growth prospects still have great upside potential, but
they are rallying fast.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental research. That’s why all 1178 stock trades
recommended in our newsletters since 2001 averaged hefty +24.0%
annualized realized gains!
To
multiply your wealth trading high-potential gold stocks, you need to
stay informed about what’s going on in this sector. Staying
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analysis.
The
bottom line is this young gold-stock upleg is accelerating.
Speculators and investors are increasingly realizing that this
sector’s powerful surge since early March is the real deal. So they
are rushing to chase this momentum by redeploying in gold stocks.
The more they buy, the faster the miners rally attracting in even
more capital inflows. Yet in typical young-upleg fashion, bearish
psychology lingers in a wall of worry.
Traders fear gold stocks have surged too far too fast, growing too
overbought. While that may prove true in the very short-term, from
a broader upleg-correction-cycle context this sector remains
slightly oversold. The gold stocks have to blast far higher and
multiply their gains before they get anywhere near upleg-slaying
levels of overboughtness. So there’s nothing to fear technically
here, pullbacks should be bought. |