After a decisive risk-off feel Thursday morning, U.S. stocks increasingly looked exhausted in the immediate to near-term, and by day’s end managed to close higher for the day.
More safe-haven assets like bonds and gold saw the opposite move and closed off the session highs. And gold-mining stocks, as represented by the popular Market Vectors Gold Miners ETF (NYSEARCA:GDX), after trading higher by more than 2.50% on the day at one point, closed the day in the red by 3.17%, thus flashing a notable bearish reversal.
While I still think the GDX ETF is a buy on dips, Thursday’s positive-to-negative reversal may just be the cause for a pause in the rally in gold mining stocks for the near term.
Fact: gold and gold mining stocks are beating just about any other asset class or ‘industry’ year-to-date. At Thursday’s intraday high, the GDX ETF was higher by about 94% for the year and had rallied close to 120% off the January lows. That’s an impressive move by any standard.
While mean-reversion moves — i.e. near-term pauses and pullbacks — are always part of any intermediate- to longer-term rally, this move in the GDX ETF can now be looked at as a new trend, and thus active investors can look to simple trend-following strategies to ‘trade’ this instrument.
On the multiyear weekly chart, we see that after a multiyear down-trend, the GDX ETF in February finally managed to break past the black diagonal resistance line and has been an unstoppable force since.
The initial stage of the breakout in February was ‘blamed’ on general fear in the stocks universe, while later stages of the rally were attributed to the weakening U.S. dollar. However, stocks then staged a sharp multimonth rally, and the U.S. dollar also stopped going lower along the way, yet gold and gold mining stocks continued to ascend.
In other words, something structurally has changed in the way that gold and gold mining stocks behave, and it’s bullish still for the time being.
On the daily chart, we see that the GDX ETF in May found support at its rising yellow 50-day simple moving average, which now, through the lens of trend following, becomes an important technical reference/support line.
ote that Thursday’s intraday rally marginally pushed the GDX ETF above last week’s highs before reversing notably lower. This lack of buying sustainability is a sign that buyers may be exhausted in the near-term. So, more risk-averse investors could look to buy the next dip upon a bullish reversal but more active traders may be able to play some short side in GDX using Thursday’s intraday highs near $27 as a last resort stop-loss.
Option traders could also look to sell far-out-of-the-money call spreads on GDX, as implied volatility is still elevated.
