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 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 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!
The
dominant primary driver of gold-stock prices is gold, and its own
correction at that point also looked too immature relative to bull
precedent. So I concluded back then that “...with
gold stocks remaining very overbought technically, and greed still
elevated after an insufficient selloff, a resurgent correction is
likely. That could easily extend to 25% in GDX, another 20% lower
from this week’s levels.” Boy was that mocked!
Successfully
multiplying wealth in the markets requires buying relatively-low
before later selling relatively-high. But that can only be
accomplished by being contrarian,
fighting the herd
to do whatever is least popular at any time. When most gold-stock
traders fervently believed a mere 12.2% GDX selloff over just four
trading days was enough after a massive 134.1% upleg, the contrarian
trade was to short gold stocks.
We were doing that
at the time in our newsletters, with inverse-leveraged gold-stock
ETFs and gold-stock-ETF put options. Our many long gold-stock and
silver-stock trades had been stopped out at big-to-huge realized
gains in late July to late August as this sector started rolling
over into correction mode. When gold-stock uplegs become too
euphoric and overbought, it is prudent to
ratchet-up
trailing stop losses.
Tighter stop
percentages enable traders to ride uplegs as long as possible, while
still maximizing gains when they inevitably roll over and fail.
During that last upleg, 17 and 9 stock trades in our weekly and
monthly newsletters were stopped out at average +81.3% and +83.6%
absolute realized gains. Those annualized to huge +303.9% and
+334.9% averages! With all that cashed out, we could play the short
side.
But GDX continued
consolidating high into mid-September, extending that
greed-fostering drift
for over a month.
With most traders convinced the selloff danger had passed, the
lying-in-wait correction struck with a vengeance. In just five
trading days GDX plunged another 12.2%, taking it to a new
correction-to-date low of $37.63. But that only made for a 15.4%
total selloff, still way under that 36.5% bull-to-date average.
Naturally
correction worries flared again after that sharp drop, greed faded
as fear mounted. But these necessary rebalancing selloffs are most
effective at accomplishing their missions when they can lure the
most traders into complacently staying deployed. There’s nothing
like suffering big losses to shatter the greed from upleg toppings.
Those are only possible when corrections sucker traders into
thinking they are over.
Thus countertrend
rallies within corrections are often incredibly strong, keeping the
flame of greed alive. By mid-October GDX had rallied back 8.8%, and
was only 7.9% below its early-August peak. That yet again led many
gold-stock traders to conclude the worst of the selling was behind
them. But if they had consulted a chart for essential perspective,
they would’ve noticed the
solidifying
correction downtrend.
By that point GDX
had carved two lower highs and two lower lows, which is evident in
this chart. So we held on to our gold-stock-short trades and
refused to go long any gold stocks or silver stocks at all. The
correction still hadn’t done anywhere close to enough work to
eradicate greed and overboughtness. That proved wise, as over the
next couple weeks into late October GDX fell another 10.8% to a new
correction low.
But even at
$36.52, this leading gold-stock benchmark was still only down 17.9%
from early August. That was getting closer to the right magnitude
for gold stocks, but was still on the small side. Although GDX
bounced a bit out of that selloff, the most-challenging time in the
correction was still coming. It hit right in the wake of early
November’s US elections, where the results weren’t quite what
traders were expecting.
Remember polling
leading into that voting showed Democrats crushing Republicans in
both chambers of Congress and the presidency. But once the votes
were counted, that blue-wave sweep didn’t materialize. Democrats
lost a relatively-large number of House seats, leaving their
majority very narrow. And before this week’s Georgia Senate
runoffs, Republicans looked like they were going to keep that upper
chamber.
So a couple days
after early November’s elections, traders figured a divided
government made another big pandemic-stimulus spending bill much
less likely. Thus they reasoned the Fed would have to step in with
even more quantitative-easing money printing. So GDX rocketed 7.2%
higher to $41.23 that Thursday on a 2.5% gold surge. That
blistering post-election spike was
definitely a
breakout
from GDX’s downtrend!
That was without a
doubt the most-psychologically-challenging day of that correction
for contrarian gold-stock traders trying to maintain perspective.
The hobbled-Congress-Fed-money-printing arguments were sound, and
very bullish for gold and its miners’ stocks. The gold-stock
correction could very well have been over, despite still being
shallow and short. But one key trading rule saved contrarians from
buying high.
Breakouts
need to
be confirmed,
meaning gold-stock prices need to spend a few trading days well into
that upside-breakout territory. News-driven spikes above
correction-downtrend resistance lines aren’t terribly uncommon. The
real test is whether they are sustained after whatever the catalytic
news was soon starts to fade from traders’ minds. GDX needed to
hold those levels before green lighting buying.
It looked to on
the day after that post-election spike, with this leading gold-stock
benchmark enjoying a 0.5% follow-up gain. But in the next couple
trading days after that, GDX collapsed 6.2% and 3.4% which hammered
it well back into its correction downtrend! So that election-spike
breakout
was proven false
within three trading days. Since the news lifecycle is so fast,
news-driven breakouts are more suspect anyway.
After that
election-spike high failed to hold, gold stocks just crumbled over
the next several weeks or so. Traders finally realized the
correction had duped them, it remained alive and well despite the
sharp gold-stock rallies within. By November 24th in that
usually-quiet Thanksgiving week, GDX had fallen another 19.3% to a
deep new correction low of $33.42! That extended that total selloff
to 24.9% over 3.6 months.
I finally decided
to bite that day, adding the first new long-gold-stock trades in our
weekly newsletter since late June. That gold-stock correction
hitting my months-old 25% downside target was a minor factor. Much
more importantly, GDX had been battered back under its 200-day
moving average which is strong support in bull markets. The major
gold stocks
were finally oversold,
and sentiment was pretty darned bearish.
While I wasn’t
convinced gold stocks’ correction was over that day, trading
campaigns for subsequent uplegs are best layered in across a couple
months. The idea is to attempt to straddle the actual bottom by
buying in relatively-low
both before and
after it.
Gradually adding new trades during a likely bottoming is the
highest-probability-for-success way to redeploy near correction-low
prices. So we started doing that.
Major upleg
toppings and correction bottomings are never certain in real-time.
They only become known well after the fact, after ensuing price
action proves them out. And GDX’s strong uptrend since late
November is increasingly solidifying the technical case that a new
gold-stock upleg is indeed underway. Those correction lows are
looking ever more decisive with each passing day, a very bullish
omen for this sector.
Like a correction
is a downtrend formed by a series of lower highs and lower lows, an
uptrend is drawn by sequential higher lows and higher highs. And
that is exactly what GDX has achieved over the last six weeks or so,
oscillating around its major 200dma support to coalesce into a new
uptrend. That December price action was so encouraging we kept
adding new gold-stock and silver-stock trades as GDX recovered.
Those now number
10 and 6 in our weekly and monthly newsletters since this sector’s
late-November bottoming. But despite several higher lows and higher
highs GDX carved since then, there was one nagging technical doubt.
Right up until year-end, this dominant gold-stock benchmark remained
stuck in its correction downtrend and under its 50-day moving
average. Was that just another countertrend rally?
Two prior times in
its recent correction, GDX had climbed from the lower support to the
upper resistance of its downtrend. This latest mostly-December
rally was the third. While redeploying in beaten-down
high-potential fundamentally-superior gold stocks was still prudent
even if that correction hadn’t yet given up its ghost, deeper lows
would’ve been painful. Loose trailing stops should’ve enabled us to
ride them out.
The major gold
stocks entered this young new year still in their correction
downtrend and still under GDX’s 50dma, which is another strong
overhead-resistance zone in corrections. So there was a good
technical case that rebalancing selloff was still biding its time.
But on the first trading day of 2021, the odds of that collapsed.
Right out of the gates, GDX blasted 6.9% higher to a major new upleg
high of $38.51!
That further
fleshed out this apparent new upleg’s uptrend, which is very clear
in this chart. That extended GDX’s higher-high streak since late
November’s trough to $36.50, $37.29, and $38.51, nicely
complementing its parallel higher lows of $33.42, $34.29, and
$35.28. But more importantly technically, that January 4th surge
blasted GDX
decisively above
both its downtrend resistance and 50dma on no news!
Remembering the
election-spike false breakout, I didn’t get too excited about this
latest breakout when it happened this Monday. But on both Tuesday
and Wednesday, GDX held those new highs closing right up there at
$38.50 and $38.45. That made for
several trading
days in a row
confirming this major upside breakout, which didn’t happen in early
November! And gold stocks are unusually-resilient compared to gold.
The major gold
stocks and thus GDX tend to mirror and amplify gold’s own price
action
by 2x to 3x.
That election spike quickly collapsed when GDX plunged 6.2% on a
brutal 4.4% gold down day. Though mild 1.4x downside leverage, that
knocked GDX back into its downtrend. On this Wednesday January 6th,
gold suffered a big 1.5% down day. Normally GDX would plunge 3.0%
to 4.5% on that, impairing its breakout.
Yet gold stocks
all but ignored gold’s latest drop! GDX merely shed 0.1% on close
that day, making for trivial 0.1x downside leverage which is pretty
rare on a sharp gold fall. And as I pen this essay midday Thursday,
GDX continues to hold near $38.00 well into breakout territory.
This is increasingly looking like the real deal. And if that proves
true, gold stocks’ next major upleg
portending big
gains
is already well underway.
GDX soared 134.1%
higher in last summer’s upleg, and 76.7% higher in the one before
that. This bull’s four uplegs so far have averaged massive 99.2%
gains!
Another doubling
from late November’s low isn’t a stretch at all, especially with
central banks printing money like there is no tomorrow which is
super-bullish for gold prices. So far GDX has only climbed 15.2% at
best in this likely upleg, which isn’t much yet.
That means
fundamentally-superior gold stocks and silver stocks
can still be
bought relatively-low,
before this next move higher really gathers steam and entices in big
capital. While there are no certainties in the markets, the GDX
technical action since late November culminating in this week’s dual
downtrend-resistance and 50dma breakouts really increase the odds
that gold stocks’ recent correction indeed ended then.
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!
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better time than around a correction-bottoming buying opportunity.
The
bottom line is gold stocks kicked off 2021 with a major upside
breakout. The leading gold-stock ETF finally burst decisively above
its recent correction’s downtrend resistance and 50-day moving
average this week. And the major gold stocks have confirmed that
breakout since by holding those high levels despite a big gold
plunge. All this really increases the odds that gold stocks’ next
bull upleg is indeed underway.
On average
major-gold-stock prices doubled during each of this bull’s prior
four uplegs! So a likely young fifth one starting to power higher
offers great opportunities for contrarian traders to multiply their
wealth again. The gold miners are making money hand over fist with
these high prevailing gold prices, and the epic money printing
driving them isn’t going anywhere. That’s a tasty recipe for a
major gold-stock upleg. |