The
gold miners’ stocks have just been hammered, plunging to new
correction lows. That shattered their indexes’ 50-day moving
averages, pounding nails in the coffin of this sector’s recent high
consolidation. This necessary correction probably isn’t over yet.
It is still small and short compared to this bull market’s
precedent, the gold stocks are nowhere near oversold, and they are
heading into a seasonal-plunge month.
Seeing the gold stocks rolling over into a correction shouldn’t
surprise anyone. They enjoyed a great run, as evident in their
leading and dominant sector benchmark the GDX VanEck Vectors Gold
Miners ETF. From mid-March’s pandemic stock-panic lows to early
August, GDX rocketed 134.1% higher in just 4.8 months! That
powerful and fast upleg left gold stocks seriously overbought,
necessitating a correction.
That
healthy process to rebalance stretched technicals and greedy
sentiment began right away. In the first four trading days after
GDX peaked at $44.48 in early August, this ETF plunged 12.2%. The
major gold stocks of GDX mirror and amplify gold, which
overwhelmingly drives their earnings. So the gold-stock selling
ceased with gold’s own sharp selloff. Gold had shot parabolic to
extraordinarily-overbought levels.
But
gold’s nascent correction quickly lost momentum, so this metal
started drifting sideways in a high consolidation. The gold stocks
followed, with GDX meandering between about $40 to $43 for over 5
weeks beginning in mid-August. That truncated gold-stock correction
morphing into a much-less-painful high consolidation bred much
complacency. Traders mostly assumed the gold-stock selloff had
already passed.
That
was premature and risky, as I wrote in an essay a few weeks ago
arguing that gold stocks were
still in
correction mode. My contrarian conclusion then was “...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.” That has started to come to pass.
GDX plunged
sharply this week, falling 3.7% Monday and another 6.3% Wednesday!
That first drop just shattered this leading gold-stock benchmark’s
50-day moving average, which is the highest-probability support zone
for high consolidations.
Once 50dmas decisively fail, selling tends to compound as technical
damage mounts. The next stop after 50dmas is 200dmas, and GDX’s was
way down at $33.15 this week.
Revisiting GDX’s
200dma today would make for a 25% gold-stock correction, much more
in line with bull-to-date precedent. That seems probable given the
technical situation in gold. In last week’s essay I dug into
gold’s
overboughtness risk. The gold stocks will keep correcting
as long as gold does,
with GDX very likely to leverage gold’s downside by 2x to 3x like
usual. The fat lady has yet to sing on gold’s own selloff.
Neither gold nor
its miners’ stocks are likely to decisively bottom, paving the way
for their next big uplegs, until their recent overboughtness is
worked off. That can be measured by comparing GDX’s daily closes
with their underlying 200dma. Dividing the former by the latter
yields a construct I call the Relative GDX, or rGDX for short.
Considering gold-stock price levels
relative to their
200dmas
yields great timing insights.
This
Relativity
Trading system I developed well over a decade ago shows that
relative multiples like this rGDX often
form horizontal
ranges
over time. Gold-stock uplegs within ongoing bull markets tend to
peak at similar levels relative to GDX’s 200dma. And the subsequent
rebalancing corrections also tend to bounce at similar rGDX levels.
Gold stocks can be very profitably traded within this Relativity
trend channel.
These Relativity trading ranges are defined based off the past 5
calendar years of data. That yields rGDX major support and
resistance at 0.85x and 1.50x. In other words, during this
gold-stock bull this sector’s leading benchmark mostly traveled
within 85% to 150% of its 200-day moving average. The former is the
time to buy relatively low before a major upleg, while the latter is
the time to sell relatively high as it peaks.
This
latest massive post-stock-panic upleg was born at
radically-oversold levels way down at 0.694x GDX’s 200dma!
Because of that anomalously-extreme oversoldness, we backed up the
truck to heavily deploy in fundamentally-superior gold and silver
miners in the aftermath of that rare stock panic. These specific
trades filled our subscription newsletters, recommended to the
people who keep us in business.
I
publicly wrote about the coming incredible gold-stock opportunities
in that post-panic upleg in March and April. On March 20th in an
essay on mid-tier
gold miners’ latest quarterly results, I concluded gold stocks
had “epic
potential to mean revert radically higher as fear fades and gold
recovers, yielding huge gains to early contrarians.” GDX was still
trading at $20.55 the day that essay was published, not far off its
panic lows.
On
April 3rd I analyzed
gold stocks’
crash and V-bounce in another essay. With GDX still trading
under $25, I wrote “All
this argues that a major new gold-stock upleg is getting
underway, portending big gains coming! Gold supports this outlook
too.” Those radically-oversold stock-panic rGDX lows were a key
reason gold stocks’ prospects were so darned bullish then. Indeed
GDX rocketed 134.1% higher over 4.8 months.
Our dozens of
gold-stock positions soared to huge unrealized gains. As long as
gold stocks didn’t grow too overbought, we could keep riding their
powerful upleg higher with loose trailing stop losses. But starting
in late July, GDX’s overboughtness was mounting. The rGDX
surged as high as 1.454x then, indicating that gold stocks had run
too far too fast to be sustainable. That was challenging 1.50x
upper resistance.
Gold stocks’ own
levels relative to their 200-day moving averages aren’t the only
consideration for gaming toppings after major uplegs. Gold itself,
which is again this sector’s dominant primary driver, was hitting
far-more-extreme
overboughtness levels per its own Relativity metric. And when
gold inevitably turned south, so would its miners’ stocks. So we
prudently took precautions to lock in more of our massive gains.
When a Relativity
trading indicator nears extremely-overbought upper resistance, it is
time to ratchet up trailing-stop-loss percentages. Early in
new gold-stock uplegs following corrections, we don’t want to get
whipsawed out of young trades prematurely before those uplegs near
harvest. So looser stop losses are wise. Given the wild volatility
inherent in this small contrarian sector, I generally start with 25%
trailing stops.
It takes rare
serious-selloff circumstances to trip those, they are kind of like
catastrophe insurance. But as uplegs mature and gains mount, those
stop-loss percentages are tightened as the rGDX marches ever
higher. This time around I started ratcheting up our trailing stops
in late July as the rGDX shot over 1.35x. If gold stocks are moving
normally, those stops are tightened in 5% increments like from 25%
to 20% to 15%.
Some uplegs give
enough time to ratchet all the way to 5% trailing, but this latest
one was moving fast with gold shooting parabolic. So we were able
to get to 10% near the end of July, locking in more of our fat
unrealized gains. When gold and thus gold stocks started rolling
over, the vast majority of those were automatically mechanically
cashed out as realized gains. This discipline helps maximize
upleg winnings.
Practically, it is
impossible to precisely call correction bottomings and upleg
toppings in real-time. Buying relatively low is done when fear
reigns and it feels miserable to redeploy in a bombed-out sector.
But later selling relatively high is much more challenging since
greed and euphoria can carry uplegs deeper into extreme
overboughtness before they fail and give up their ghosts. That
makes selling outright a gamble.
But ratcheting up
trailing stops allows gold-stock traders to stay deployed as long as
possible when this sector’s uplegs are peaking. No sell decisions
are necessary, as these mechanical stops maximize the potential
realized gains. We don’t need to exit until selloffs force our
hands. Today’s gold-stock correction was definitely predictable
and anticipated, as serious overboughtness per the rGDX always
portends selloffs.
Major gold-stock
corrections are inevitable after major gold-stock uplegs. Bull
markets are an alternating series of uplegs followed by
corrections. While it is foolish to stay long gold stocks in the
latter absorbing serious losses, there are definitely ways to trade
corrections. With all our huge upleg gains realized and safe in
cash, I recommended a couple other types of trades to our newsletter
subscribers to game that selloff.
They included
leveraged inverse-gold-stock ETFs and gold-stock-ETF put options.
These enjoy gains proportional to gold-stock losses during
bull-market corrections. We still have these bearish gold-stock
trades on our books, as this gold-stock correction likely isn’t over
yet. That again becomes apparent first in prevailing rGDX levels.
As of the middle of this week, that technical metric had only
retreated to 1.135x.
While that isn’t
seriously-overbought any more, again the rGDX trading range now runs
between 0.85x to 1.50x. It is a long way down yet from 1.135x GDX’s
200dma to 0.85x! Today’s correction is the fourth of this
gold-stock bull. The first three bottomed at far-lower rGDX levels
averaging just 0.754x! Odds are today’s correction won’t plunge so
deeply, as all those earlier ones had unique circumstances
intensifying them.
But it is hard to
imagine the gold stocks not at least returning to GDX’s 200dma after
blasting higher in their second-biggest upleg of this bull.
Again that would make for a 25.5% GDX correction this week, but
GDX’s 200dma continues to gradually rise. Relativity charts
effectively collapse 200dmas horizontal to 1.00x, and render
all the price action meandering around them in perfectly-comparable
percentage terms.
GDX is likely to
keep selling off on balance until the rGDX returns to 1.00x.
Bull-to-date precedent argues for a bigger gold-stock correction
too. This bull’s first three corrections averaged hefty 36.5% GDX
losses over 8.0 months each! As of the middle of this week, GDX’s
current correction was merely 15.4% in just 1.6 months. That still
seems much too small and short to effectively rebalance away greedy
sentiment.
Another factor is
coming into play which could accelerate gold-stock downside over the
next month or so, seasonality. The gold stocks are on the verge of
their biggest seasonal selloff of the year, which runs from
late September to late October on average. This next chart is
borrowed from my last essay on
gold-stock
seasonality from late July. It distills out gold-stock
performance through modern bull-market years.
In gold those
include 2001 to 2012, which was followed by a bear, and then 2016 to
2019. 2020 isn’t yet factored in since it remained a work in
progress. The older HUI gold-stock index, which closely mirrors GDX
since they include most of the same major gold miners, has to be
used instead of GDX. Born in May 2006, GDX’s history is
insufficient for long-term seasonal analysis. But it is
interchangeable with the HUI.
All these
gold-bull years’ price action is individually indexed off the
previous year’s final close, which is recast at 100. That keeps
gold-stock-price moves comparable in constant-percentage terms
regardless of prevailing price levels. Then all these annual
indexes are averaged together to reveal this sector’s seasonal
tendencies. Now right as GDX is correcting, we are staring into
this sector’s biggest seasonal selloff.
The
gold stocks tend to suffer a sharp seasonal plunge from late
September to late October, between their powerful autumn and
winter seasonal rallies. The major gold stocks per the HUI tend to
peak on September’s 14th trading day, which mapped to September 21st
this year. Then they average a 6.6% retreat into October’s 19th
trading day, which happens to be October 27th in 2020. That is a
tough month.
While 6.6% may not sound like much, that dwarfs the HUI’s other two
seasonal corrections averaging just 2.7% and 2.8% declines. And the
averaging inherent in seasonality analysis really smoothes out the
big drops. Seasonals prove strongest when they act as tailwinds
for prevailing trends driven by technicals and sentiment. And the
major gold stocks are certainly in correction mode entering this
seasonal plunge.
So
the overdue gold-stock selloff necessary to eradicate the serious
overboughtness and widespread greed as this sector’s last major
upleg peaked could very well largely run its course over the next
month or so. The seasonal downside tailwinds could bring this
correction to a head sooner than it otherwise might have played
out. GDX will likely have to correct at least 25% before its next
upleg can start marching.
If
we get lucky with a mere 25% correction after such an enormous
gold-stock upleg, that would make for another 10% or so lower during
this coming seasonally-weak month. That is roughly in line with
this bull’s precedent. The biggest wildcard is what happens in
gold, which shares this sharp seasonal plunge from late
September to late October. I discussed that front in last week’s
essay on gold’s
overboughtness risk.
As
of the middle of this week, gold’s own correction deepened to 9.8%
since its last upleg shot parabolic climaxing in early August.
Again the major gold stocks of GDX tend to amplify material gold
moves by 2x to 3x, implying a correction of 20% to 30% on a
10% gold one. But ominously gold still remained 8.5% above its
200dma this Wednesday! That key baseline is currently way down at
$1714, still far lower from here.
A
200dma approach for gold’s correction would extend it to a serious
16.9% today! But with that 200dma constantly rising, a better
estimate for a month from now might be 15%. If GDX leverages that
kind of gold selloff by 2x to 3x, that implies a more-dire
correction of 30% to 45%. 30% total is certainly possible in this
seasonal plunge, but 45% is excessive. Remember this bull’s prior
GDX corrections averaged 36.5%.
A
30% GDX correction would bash the major gold stocks back down to
$31.14. If that comes to pass, so far the gold stocks have only
seen half their correction. Odds are GDX will decisively bottom
somewhere around 25% to 30% below early August’s major upleg peak.
While painful for those trapped in it, this is really exciting as
corrections yield the best buy-relatively-low opportunities seen
within ongoing bull markets!
All
bull markets naturally flow then ebb, taking two steps forward
before retreating one step back. Their price action gradually
meanders around uptrends. This normal upleg-correction pattern
keeps sentiment balanced, extending bull markets’ longevity. And it
is a huge boon for traders, offering excellent mid-bull
opportunities to buy relatively low before later selling relatively
high. That greatly expands bulls’ potential gains!
So
I’m eagerly awaiting this correction’s bottoming to aggressively
redeploy in fundamentally-superior gold and silver stocks at
lower prices before their next major upleg gets underway. I’ll
use this excellent rGDX indicator in concert with others to decide
when high-probability-for-success buying opportunities are
returning. Actively trading gold and gold-stock bulls requires
study and discipline, but multiplies your wealth fast.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We layered into dozens of new positions before
gold stocks grew too overbought, which were stopped out recently at
huge realized gains running as high as +199%! Our subscribers
multiplied their wealth within months.
To
profitably trade high-potential gold stocks, you need to stay
informed about their technicals, sentiment, and fundamentals. And
what is moving gold, their dominant primary driver. Our popular
newsletters are a great way. They draw on my vast experience,
knowledge, wisdom, and ongoing research to explain what’s going on
in the markets, why, and how to trade them with specific stocks. Subscribe
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Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The
bottom line is gold stocks are still correcting after soaring to
seriously-overbought levels when their last upleg peaked in early
August. The deceiving high consolidation after that failed
decisively this week when GDX shattered its 50dma, proving this
sector’s correction is alive and well. Only about 15% so far, it is
likely to extend to 25% to 30% before overbought technicals are
worked off and sentiment is rebalanced.
Seasonality is likely to exacerbate this necessary selling over the
coming month, which is gold stocks’ biggest seasonal plunge of the
year. These tailwinds pushing this sector lower in concert with
normal correction dynamics could accelerate this selloff into
finishing its vital mission sooner. That will be the time to
aggressively redeploy in beaten-down gold stocks, buying great
miners at relatively-low prices. |