Commodities Analysis & Opinion

A Healthy Correction in Gold Stocks Is a Buying Opportunity


Gold stocks are pulling back from the overbought risk area, as anticipated. Let’s take a look at a rarity for me; a public article discussing a nominal technical situation rather than bopping you over the head with macro fundamentals and macro indicators. In this article, I want to publicly go back to my first love, which is nominal TA (markets, stocks, etc.), which was how I started out long ago than I care to believe.

The correction is healthy if you were prepared for it. We were. During the trading week, we anticipated a correction with most of the rally complete but also with an open question as to whether at least one GDX (NYSE:GDX) upside gap would fill first. It turned out it wouldn’t, and that is a good thing. Those upside gaps will be handy targets after the short-term correction plays out.

Below is the current version of the chart. As of Thursday night, GDX rests on the initial support we reviewed. But a better scenario is for a downside gap fill below 29 and potentially a test of support that coincides with the 200-day moving average in the 27-28 area. Support could hold here, and indeed GDX could bounce to fill the gap it left last week at 31.42. But if you’ve been a gold stock trader for long enough, you know of the sector’s penchant for taking things to extremes, both ways. The best support starts with a gap fill below 29.

As a side note, check out the Golden Cross that showed up as if on cue in the Bug-o-Sphere as a bullish signal. Well, a cross of a shorter-term moving average above a longer-term one is bullish. But on January 24, I had warned about the bearish implication, and sure enough, the pullback came. The theory is that scores of self-made TAs see things like that and react to them. They crowd the bull side of the boat, and then the wise guys and their machines do the inevitable… flush! It works just as reliably going the other way when a Death Cross is touted in media.

Again, it’s good to get this reaction in GDX. It’s healthy. It’s never a bad time to clean a sector with supporters as ardent as those of the precious metals. But provided the macro plays the ball as it generally has been, the correction is a buying opportunity, and we’ll be keeping a close watch on quality miners and royalty companies.

As it is, I hold few positions, have covered a short position on the sector, and plan to have a bit of patience and let the sector flash its opportunity out ahead. It is not a bearish situation. It’s a healthy correction, and it’s on cue.GDX Daily Chart


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