Yesterday we saw the GDXJ close lower for the 5th consecutive trading session, while also closing below its lower Bollinger Band for the 2nd straight trading session:
Yesterday’s trading session also formed an ‘inside day’ (higher low and lower high from previous day) amid relatively range-bound trading activity.
Nothing remarkable in itself and the pressure that GDXJ has been under due to size constraints within the gold exploration sector has been well documented in the last week. However, at least for the time being GDXJ has stopped going lower as the fervor (and bearish sentiment) around its rebalancing has reached a fever pitch.
Another interesting aspect of yesterday’s GDXJ close is that the last two times this happened (5 days down with consecutive closes below lower BB) powerful rallies were right around the corner…
From December 16 2014-January 21 2015 GDXJ rallied 44.75%:
GDXJ (August 2014-February 2015)
Then on January 20th 2016 GDXJ put in a major low from which it would go on to rally ~135% over the next 4 months (before sustaining its first real correction of 15%+):
GDXJ (October 2015-May 2016)
Two samples do not represent a significant sample size. However, a short term oversold condition within a longer term uptrend should theoretically offer a buying opportunity. Regardless of the GDXJ rebalance voodoo if we are truly in a bull market in the gold mining sector (particularly the gold exploration sector as senior producers scramble to replace reserves) an important buying opportunity shouldn’t be far away.
A couple of quick thoughts on the GDXJ. First of all I don’t know how it will play out exactly. Historically we have seen rebalancings get front run well in advance of the actual rebalance date, I don’t see any reason why this time will be different. In fact, we’ve already seen considerable front running (see the selling in Continental Gold $CNL, Klondex $KDX, and many of the other ‘deletes’). My best intuition is that the strongest names in the ‘delete’ pile will hold up just fine and may have already seen their lows, while the weakest ones (without much institutional support) will still see more downside.
Final thought: This is a tricky market environment in the precious metals sector and given the weak seasonal period the sector is now entering I certainly don’t think we are in for a move straight higher like we saw during the first half of 2016. That being said there are enough positive divergences out there that it’s time to seriously take notice. The Macro Tourist‘s main takeaway that this recent GDXJ/JNUG fiasco is actually a bullish omen long term is well considered. After all fund inflows to a sector aren’t exactly a bearish thing…
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