As we enter the month of July (a month which has often marked important lows for the sector), the gold miners as represented by the GDX appear to be at a key inflection point. It’s not an overstatement to say that the GDX has spent the last three months essentially going no where. Last month’s ~4% range for the entire month coupled with record low realized volatility (as evidenced by the monthly-ATR(14) sinking to fresh lows), signals that market participants don’t have much conviction either way in the goldies:
GDX (Monthly)
However, this could all be about to change. It’s unusual for support to be breached on multiple days over a two-week period only for price to rise right back above support. Well that’s exactly what took place in the GDX during the last couple of weeks with a rare “double failed-breakdown” scenario unfolding:
GDX (Weekly)
I believe the correct interpretation of the price action since the April peak is a descending triangle; typically descending triangles are bearish chart patterns, however, with price unable to breakdown out of the triangle we now have tremendous potential for a reversal higher from a ‘failed’ move lower. If the GDX can break the downtrend drawn from the April peak within the next couple of weeks it would project a move up to $23.50+ in the GDX over the near term.
With sentiment and trader positioning also at extremely depressed levels in the precious metals sector it is notable that the gold miners have been significantly outperforming the metals themselves. This phenomenon is evidenced by the GDX/GLD ratio breaking out on Friday:
GDX/GLD (Daily)
The impressive outperformance in gold mining shares is evidenced by the fact that since the close on June 15th gold is down more than $24/oz while the GDX is actually higher over the same time period.
The simple facts are that both gold and silver bounced off major levels of support last week, toss in extreme bearish sentiment and underweight market participant positioning in the precious metals sector overall, and we have a recipe for a rally. The fact that mining shares stopped going lower two weeks ago only serves to highlight that this sector could be a coiled spring ready to fly with the support of seasonal tailwinds.
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