Today's post will be chart-heavy and text-light. I just want to highlight all of the chart breakouts I'm seeing across the gold and silver complex. This is exactly what you want to see as confirmation that a new bull market has started. I marked up each chart and put some comments here and there. The blue circles represent price targets based on the measured move of the breakout. Enjoy
If you follow me on Twitter, then you might have seen a retweet from Friday where it was shown that big money is flowing into GDX calls. Also noted was the fact that there was "huge put selling" in NUGT (3x bullish miners ETF) in recent weeks. Both of these observations are suggest institutional money has turned very bullish (at least in the short-term) on the sector.
@WallStreetJesus posted the following graph of May 20, 2016 option activity in GDX. You can see clearly that call buying is overwhelming put activity. The biggest money is being placed around the $25 strike, which is a full 10% higher than current levels.
Today, right out of the gate, we get another options update, this time by @SL_SteamRoom:
In other words, the bullish option action from Friday is being followed by even more bullish option activity this morning.
The takeaway here is that when this kind of money is being bet on direction AND timing, investors need to take note. This is definitely bullish not only for the miners, but the underlying metals as well.
To be clear, I am writing this BEFORE the Most Important Fed Meeting Ever In the History of the World (italics in lieu of sarcastic font). That said, gold, silver, and the mining sector is seeing a nice pop this morning which, on the daily chart, shows a breakout from the descending channel. This might end up being yet another pump & dump with the FOMC announcement less than two hours away.
The breakout is a bit more pronounced on JNUG's chart as price has overcome resistance going back to mid-October. This is really FYI only since JNUG, aka "The Widow-Maker" is a leveraged ETF and is subject to wild swings.
Of particular interest on both charts is solid lower support: $18 for GDXJ and $30 for JNUG. If either of these ETFs close the day below these respective levels, then the next leg of the miners bear market is upon us. If by some miracle the miners actually rally after the FOMC, then look for closes above the 50 dmas to confirm a short-term bullish bias.
Before you get all excited, I have to lay down the caveat that the big picture still remains fugly for minors. That being said, yesterday's action was encouraging for the bulls, at least in the short term.
So, as the title states, the junior minors, as measured by GDXJ, staged a nearly 10% intraday reversal from low to high on volume more than 3x average. In the process, it posted an outside reversal day relative to Thursday's trading. Investopedia.com explains an outside reversal day as "a price chart pattern in which a security's high and low prices for the day exceed those of the previous trading session. The outside reversal pattern is called by candlestick chartists and analysts a "bearish engulfing" pattern if the second bar is a down candlestick, and a "bullish engulfing" pattern if the second bar is an up candlestick."
Since GDXJ reversed higher, we obviously have a "bullish engulfing" pattern. These patterns often mark reversal points, or trend changes. Since we're on a daily chart, any trend change would be short term in nature, at least until the weekly or monthly charts start turning around too.
The elephant in the technical analysis room, however, is the action from Monday, July 20th when GDXJ dropped 9.5% on 4x its average volume. So here we are, four days later, putting in a huge outside reversal day, on equally huge volume and yet it only recovered back to levels from Tuesday. Put differently, there were over 111 million shares traded last week with a total float of 60.7 million shares. The entire floating supply of stock was traded nearly two times over in the span of five days!
The bulls and bears are having an epic battle at these levels which, coincidentally, is the lowest GDXJ has ever been. Given that minors are the lowest they've ever been relative to gold, coupled with the fact that gold is trading at or below the cost of production, one would think that the risk of further sustained downside would be limited. But remember, the market can remain irrational far longer than you can remain solvent. Trade accordingly.
As much as I want to believe the latest rally has staying power, the charts are suggesting otherwise - at least in the short-term. Simply put - where's the volume? Following are two short-term daily charts, one of the large cap miners (GDX) and one of the junior miners (GDXJ).
As you can see, the rally over the last two months has occurred on progressively lower volume. As volume is a key component of any sustainable trend, we would want to see higher volumes on these upward moves. The lack of volume suggests lack of institutional conviction. While this isn't necessarily a precursor to a failed move, it's at least a red flag. In addition to the volume/price divergence, the miners are struggling to overtake their respective 200 dmas.
Given the facts stated above, combined with the fact that both of these ETFs are moving into areas of heavy resistance, I would take a cautious approach with the miners at this time. I think there's going to be a pullback, at least in the short term, that will provide a better entry position.
The miners have fallen relentlessly since topping in early July. As you can above, the GDX has lost close to 30% in the span of just 6 weeks. That's really incredible given the large cap components of this index. On Wednesday, Oct 8, the bottom fell out of the GDX in early trading, but then came the release of the FOMC minutes which sparked massive short covering across the board. The miners, which were deeply oversold, reversed course and surged higher on huge volume closing near the top of its trading range. This marked the 2nd highest volume day in the history of the GDX, falling just shy of its all-time high. The Thursday and Friday following this reversal saw the index retrace some of those gains but on declining volume. Daily MACD has crossed to the upside and RSI is now trending upward - both positive confirmations. Based on what I'm seeing, I think you can make a strong argument that we've experienced the final washout in the GDX which now sets the stage for a move higher.
All of the above comments hold true for the junior segment as well. The only difference is that the capitulation volume from October 8 was by far and away the single highest volume day in GDXJ's history.
Zooming out to a weekly chart, we can see further constructive developments suggesting that a bottom may now be in. Most importantly for the bulls, the GDX did not make a new low during the most recent sell-off. After perfectly touching the lows from December 2013, the index reversed higher on big volume. It still sits at the bottom of its two-year trading range, but the price action from last week was encouraging. Its weekly RSI has turned slightly higher but it's MACD is still showing weakness. It will take a couple weeks of higher highs and higher lows to truly confirm that a bottom is in place.
The juniors actually look better than the GDX on a weekly basis. Yes, the sell-off since July has been quick and painful, but from a technical perspective, we are seeing huge support in the low $30s. Unlike the GDX, the juniors did not revisit the lows from last December. Volume last week absolutely dwarfed any previous week's volume in the history of the GDXJ - again, another sign of technical strength.
Time will tell whether or not the bottom is in, but in the meantime, volume is making a strong argument that it is.
It appears we may have capitulation in JNUG, the triple bullish junior minor ETF. As of this writing, there is still 2.5 hours of trading left in the day and volume has already exceeded its previous single-day record by a whopping 1 million shares. Today's low perfectly touched its all-time lows from late 2013 and then reversed higher. If nothing else, expect a good-sized bounce here if nothing more than to work off these oversold levels. However, given the significant volume, today might mark a significant long-term low.
Morris Hubbard from superforcesignals.com posted a great five minute video yesterday showing "wow factor" volume coming into both gold and the miners. I encourage you to take a look here.
Here is a brief analysis from Investment Research Dynamics:
It looks like after a long 3-yr drought, we may be in the early stages of a monster move in the junior mining shares. The GDXJ junior index is up 35% YTD and 23.5% since June 1. Doesn’t seem like it, does it?
As you can see from the graph below, the junior miners have definitely rebounded off their 3-yr decline. The graphs shows the RSI, MACD and On-balance-volume indicators. The RSI and the MACD have been positively diverging from the the GDXJ since March/April. These are more “quiet” indications suggesting that smart money has been accumulating the sector.
It gets harder to “hide” when you apply the OBV on-balance-indicator, which is a “louder” indicator of big volume moving into the sector:
It’s time to start picking your favorite stock plays. Of course, there’s always the possibility that heavy intervention “mysteriously” tries to prevent a move, but right now the odds are in the favor of a big move.
It’s time to start buying into these stocks. Some of the high-quality exploration stocks and emerging producers will move up several multiples from their current prices. I have some of my favorite plays (we own all of them in the fund I manage) available for you to look into here: IRD Research Reports.
The Junior Minors 3X Bullish ETF is really setting up a nice consolidation pattern here. We have seen a drift lower for the past 7 weeks with diminishing volume. The RSI and MACD are very close to turning positive. Look to buy on any break above $26 but be sure to use tight stop. This is a highly leveraged ETF so it's not unusual to see 10-15% moves in a single trading day. Regardless of the volatility, the bullish setup is certainly appealing.