The Vaneck Vectors Gold Miners ETF (GDX) offers the most popular way to play the precious metals sector, with the instrument attracting a huge population of retail speculators. Predatory algorithms seek opportunities to trap these weak hands on the wrong side of the tape, practically ensuring high volatility. As a result, contrarian strategies often work better than trend following strategies, buying when others are selling and vice versa.
Another contrary trade may be setting up while the fund drifts near November lows, with bearish sector sentiment attracting aggressive short sellers. It’s held the Nov. 14 low for three weeks while weekly and monthly relative strength indicators have plunged to deeply oversold levels. These mechanics could signal a recovery wave that wipes out weak-handed short sellers while rewarding careful exit timing because the intermediate downtrend may continue in 2017.
GDX Long-term Chart (2006–2016)
The fund came public in the mid-30s in May 2006 and entered a sideways channel that persisted into a September 2007 breakout that topped out at $56.87 in March 2008. It broke an 11-month topping pattern in August and spiraled lower with world markets, coming to rest at $15.83 after the October crash. The subsequent uptrend unfolded at the same trajectory as the prior decline, returning to the 2008 high in December 2009.
It broke out nearly one year later and surged higher with other commodity instruments, hitting an all-time high at $66.98 in September 2011 and turning lower in a topping pattern that broke to the downside in 2012. The subsequent decline continued for nearly four years, posting a series of new lows that culminated with the January 2016 all-time low at $12.40. The subsequent recovery made excellent progress into August, stalling above $30 after it filled the April 2013 gap between $30 and $32 (red lines).
The channeled decline into November gave up more than half of 2016 rally gains while shaking out a big supply of overeager gold bugs. The monthly and weekly Stochastics oscillators have now dropped into oversold readings, raising odds for a recovery wave that recoups at least 50% of the post-summer decline. That translates into an upside target in the mid to upper 20s.
GDX Short-term Chart (2014–2016)
The downtrend cut through the 2008 bear market low (blue line) in July 2015, but momentum failed to escalate, giving way to six months of sideway action about four points below the old high. The fund gapped higher on Feb. 8, remounting resistance while setting off major 2B buy signals that denote the failure of bears to hold a resistance level. The subsequent rally wave looks impulsive, pointing to the start of a new uptrend that should last for several years, at a minimum.
The decline since August stopped at $21.76 on Nov. 14, with price action since that time grinding out a triangular pattern. Gold futures have posted new lows during this period, signaling a bullish divergence that favors a recovery rally. However, selling pressure fell short of the .618 Fibonacci rally retracement at $19.86, so we can’t rule out a climactic plunge into that support level.
On Balance Volume (OBV) surged to a multiyear high in the third quarter of 2016, adding weight to a long term bottom call, and turned lower in August. The indicator is still grinding above the prior peaks, indicating healthy consolidation and profit making as opposed to a new downtrend. Even so, an oversold rally may not yield a sizable recovery in accumulation, telling smart traders to take short-term profits rather than holding the fund for long-term gains.
The Bottom Line
The gold miners fund has been losing ground since August but should bounce strongly soon, shaking out late to the party short sellers. Even so, the bounce may not signal a subsequent run to new highs, so aggressive risk management is advised, taking profits when the uptick runs out of steam.
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