Gold Stocks Seasonal Plunge / Commodities / Gold & Silver 2020

The gold miners’ stockshave just been hammered, plunging to new correction lows.  That shattered their indexes’ 50-day movingaverages, pounding nails in the coffin of this sector’s recent highconsolidation.  This necessary correctionprobably isn’t over yet.  It is stillsmall and short compared to this bull market’s precedent, the gold stocks arenowhere near oversold, and they are heading into a seasonal-plunge month.

Seeing the gold stocksrolling over into a correction shouldn’t surprise anyone.  They enjoyed a great run, as evident in theirleading and dominant sector benchmark the GDX VanEck Vectors Gold MinersETF.  From mid-March’s pandemicstock-panic lows to early August, GDX rocketed 134.1% higher in just 4.8months!  That powerful and fast upleg leftgold stocks seriously overbought, necessitating a correction.

That healthy process torebalance stretched technicals and greedy sentiment began right away.  In the first four trading days after GDXpeaked at $44.48 in early August, this ETF plunged 12.2%.  The major gold stocks of GDX mirror and amplifygold, which overwhelmingly drives their earnings.  So the gold-stock selling ceased with gold’sown sharp selloff.  Gold had shotparabolic to extraordinarily-overbought levels.

But gold’s nascentcorrection quickly lost momentum, so this metal started drifting sideways in ahigh consolidation.  The gold stocksfollowed, with GDX meandering between about $40 to $43 for over 5 weeks beginningin mid-August.  That truncated gold-stockcorrection morphing into a much-less-painful high consolidation bred muchcomplacency.  Traders mostly assumed thegold-stock selloff had already passed.

That was premature andrisky, as I wrote in an essay a few weeks ago arguing that gold stocks were still in correction mode.  My contrarian conclusion then was “...with gold stocks remaining veryoverbought technically, and greed still elevated after an insufficient selloff,a resurgent correction is likely.  Thatcould easily extend to 25% in GDX, another 20% lower from this week’s levels.”  That has started to come to pass.

GDXplunged sharply this week, falling 3.7% Monday and another 6.3% Wednesday!  That first drop just shattered this leading gold-stockbenchmark’s 50-day moving average, which is the highest-probability supportzone for highconsolidations.  Once 50dmas decisively fail, selling tends tocompound as technical damage mounts.  Thenext stop after 50dmas is 200dmas, and GDX’s was way down at $33.15 this week.

RevisitingGDX’s 200dma today would make for a 25% gold-stock correction, much more inline with bull-to-date precedent.  Thatseems probable given the technical situation in gold.  In last week’s essay I dug into gold’s overboughtness risk.  The gold stocks will keep correcting as long as gold does, with GDX very likely toleverage gold’s downside by 2x to 3x like usual.  The fat lady has yet to sing on gold’s ownselloff.

Neithergold nor its miners’ stocks are likely to decisively bottom, paving the way fortheir next big uplegs, until their recent overboughtness is worked off.  That can be measured by comparing GDX’s dailycloses with their underlying 200dma. Dividing the former by the latter yields a construct I call the RelativeGDX, or rGDX for short.  Considering gold-stockprice levels relativeto their 200dmas yields great timing insights.

This Relativity Trading system Ideveloped well over a decade ago shows that relative multiples like this rGDX often form horizontal ranges over time.  Gold-stock uplegs within ongoing bull marketstend to peak at similar levels relative to GDX’s 200dma.  And the subsequent rebalancing corrections alsotend to bounce at similar rGDX levels. Gold stocks can be very profitably traded within this Relativity trendchannel.

These Relativitytrading ranges are defined based off the past 5 calendar years of data.  That yields rGDX major support and resistanceat 0.85x and 1.50x.  In other words, duringthis gold-stock bull this sector’s leading benchmark mostly traveled within 85%to 150% of its 200-day moving average. The former is the time to buy relatively low before a major upleg, whilethe latter is the time to sell relatively high as it peaks.

This latest massivepost-stock-panic upleg was born at radically-oversold levels way down at0.694x GDX’s 200dma!  Because of that anomalously-extremeoversoldness, we backed up the truck to heavily deploy in fundamentally-superiorgold and silver miners in the aftermath of that rare stock panic.  These specific trades filled our subscriptionnewsletters, recommended to the people who keep us in business.

I publicly wrote aboutthe coming incredible gold-stock opportunities in that post-panic upleg in Marchand April.  On March 20th in an essay on mid-tier gold miners’ latest quarterly results, I concluded gold stocks had “epic potential to mean revert radicallyhigher as fear fades and gold recovers, yielding huge gains to earlycontrarians.”  GDX was still trading at$20.55 the day that essay was published, not far off its panic lows.

On April 3rd I analyzed gold stocks’ crash and V-bounce in another essay.  With GDX still tradingunder $25, I wrote “All this argues that a major newgold-stock upleg is getting underway, portending big gains coming!  Gold supports this outlook too.”  Those radically-oversold stock-panic rGDXlows were a key reason gold stocks’ prospects were so darned bullish then.  Indeed GDX rocketed 134.1% higher over 4.8months.

Our dozens of gold-stock positions soaredto huge unrealized gains.  As long asgold stocks didn’t grow too overbought, we could keep riding their powerfulupleg higher with loose trailing stop losses. But starting in late July, GDX’s overboughtness was mounting.  The rGDX surged as high as 1.454x then, indicatingthat gold stocks had run too far too fast to be sustainable.  That was challenging 1.50x upper resistance.

Gold stocks’ own levels relative to their200-day moving averages aren’t the only consideration for gaming toppings aftermajor uplegs.  Gold itself, which isagain this sector’s dominant primary driver, was hitting far-more-extreme overboughtnesslevels per its own Relativity metric. And when gold inevitably turned south, so would its miners’ stocks.  So we prudently took precautions to lock inmore of our massive gains.

When a Relativity trading indicator nearsextremely-overbought upper resistance, it is time to ratchet uptrailing-stop-loss percentages. Early in new gold-stock uplegs following corrections, we don’t want toget whipsawed out of young trades prematurely before those uplegs near harvest.  So looser stop losses are wise.  Given the wild volatility inherent in thissmall contrarian sector, I generally start with 25% trailing stops.

It takes rare serious-selloff circumstancesto trip those, they are kind of like catastrophe insurance.  But as uplegs mature and gains mount, thosestop-loss percentages are tightened as the rGDX marches ever higher.  This time around I started ratcheting up our trailingstops in late July as the rGDX shot over 1.35x. If gold stocks are moving normally, those stops are tightened in 5%increments like from 25% to 20% to 15%.

Some uplegs give enough time to ratchet allthe way to 5% trailing, but this latest one was moving fast with gold shootingparabolic.  So we were able to get to 10%near the end of July, locking in more of our fat unrealized gains.  When gold and thus gold stocks started rollingover, the vast majority of those were automatically mechanically cashed out asrealized gains.  This discipline helps maximizeupleg winnings.

Practically, it is impossible to precisely callcorrection bottomings and upleg toppings in real-time.  Buying relatively low is done when fearreigns and it feels miserable to redeploy in a bombed-out sector.  But later selling relatively high is much morechallenging since greed and euphoria can carry uplegs deeper into extremeoverboughtness before they fail and give up their ghosts.  That makes selling outright a gamble.

But ratcheting up trailing stops allowsgold-stock traders to stay deployed as long as possible when this sector’s uplegsare peaking.  No sell decisions arenecessary, as these mechanical stops maximize the potential realized gains.  We don’t need to exit until selloffs forceour hands.  Today’s gold-stock correctionwas definitely predictable and anticipated, as serious overboughtnessper the rGDX always portends selloffs.

Major gold-stock corrections are inevitableafter major gold-stock uplegs.  Bull marketsare an alternating series of uplegs followed by corrections.  While it is foolish to stay long gold stocksin the latter absorbing serious losses, there are definitely ways to tradecorrections.  With all our huge upleggains realized and safe in cash, I recommended a couple other types of tradesto our newsletter subscribers to game that selloff.

They included leveraged inverse-gold-stockETFs and gold-stock-ETF put options. These enjoy gains proportional to gold-stock losses during bull-marketcorrections.  We still have these bearishgold-stock trades on our books, as this gold-stock correction likely isn’t overyet.  That again becomes apparent firstin prevailing rGDX levels.  As of themiddle of this week, that technical metric had only retreated to 1.135x.

While that isn’t seriously-overbought anymore, again the rGDX trading range now runs between 0.85x to 1.50x.  It is a long way down yet from 1.135x GDX’s200dma to 0.85x!  Today’s correction isthe fourth of this gold-stock bull.  Thefirst three bottomed at far-lower rGDX levels averaging just 0.754x!  Odds are today’s correction won’t plunge sodeeply, as all those earlier ones had unique circumstances intensifying them.

But it is hard to imagine the gold stocks notat least returning to GDX’s 200dma after blasting higher in their second-biggestupleg of this bull.  Again that wouldmake for a 25.5% GDX correction this week, but GDX’s 200dma continues togradually rise.  Relativity chartseffectively collapse 200dmas horizontal to 1.00x, and render all the priceaction meandering around them in perfectly-comparable percentage terms.

GDX is likely to keep selling off onbalance until the rGDX returns to 1.00x. Bull-to-date precedent argues for a bigger gold-stock correctiontoo.  This bull’s first three correctionsaveraged hefty 36.5% GDX losses over 8.0 months each!  As of the middle of this week, GDX’s currentcorrection was merely 15.4% in just 1.6 months. That still seems much too small and short to effectively rebalance away greedysentiment.

Another factor is coming into play whichcould accelerate gold-stock downside over the next month or so,seasonality.  The gold stocks are on the vergeof their biggest seasonal selloff of the year, which runs from late Septemberto late October on average.  This nextchart is borrowed from my last essay on gold-stock seasonality fromlate July.  It distills out gold-stockperformance through modern bull-market years.

In gold those include 2001 to 2012, whichwas followed by a bear, and then 2016 to 2019. 2020 isn’t yet factored in since it remained a work in progress.  The older HUI gold-stock index, which closelymirrors GDX since they include most of the same major gold miners, has to beused instead of GDX.  Born in May 2006,GDX’s history is insufficient for long-term seasonal analysis.  But it is interchangeable with the HUI.

All these gold-bull years’ price action is individuallyindexed off the previous year’s final close, which is recast at 100.  That keeps gold-stock-price moves comparablein constant-percentage terms regardless of prevailing price levels.  Then all these annual indexes are averaged togetherto reveal this sector’s seasonal tendencies. Now right as GDX is correcting, we are staring into this sector’s biggestseasonal selloff.

The gold stocks tend tosuffer a sharp seasonal plunge from late September to late October,between their powerful autumn and winter seasonal rallies.  The major gold stocks per the HUI tend topeak on September’s 14th trading day, which mapped to September 21st thisyear.  Then they average a 6.6% retreatinto October’s 19th trading day, which happens to be October 27th in 2020.  That is a tough month.

While 6.6% may notsound like much, that dwarfs the HUI’s other two seasonal corrections averagingjust 2.7% and 2.8% declines.  And theaveraging inherent in seasonality analysis really smoothes out the bigdrops.  Seasonals prove strongest whenthey act as tailwinds for prevailing trends driven by technicals andsentiment.  And the major gold stocks arecertainly in correction mode entering this seasonal plunge.

So the overduegold-stock selloff necessary to eradicate the serious overboughtness andwidespread greed as this sector’s last major upleg peaked could very welllargely run its course over the next month or so.  The seasonal downside tailwinds could bringthis correction to a head sooner than it otherwise might have played out.  GDX will likely have to correct at least 25%before its next upleg can start marching.

If we get lucky with amere 25% correction after such an enormous gold-stock upleg, that would makefor another 10% or so lower during this coming seasonally-weak month.  That is roughly in line with this bull’s precedent.  The biggest wildcard is what happens ingold, which shares this sharp seasonal plunge from late September to lateOctober.  I discussed that front in lastweek’s essay on gold’s overboughtnessrisk.

As of the middle ofthis week, gold’s own correction deepened to 9.8% since its last upleg shotparabolic climaxing in early August.  Againthe major gold stocks of GDX tend to amplify material gold moves by 2x to 3x,implying a correction of 20% to 30% on a 10% gold one.  But ominously gold still remained 8.5% aboveits 200dma this Wednesday!  That keybaseline is currently way down at $1714, still far lower from here.

A 200dma approach forgold’s correction would extend it to a serious 16.9% today!  But with that 200dma constantly rising, abetter estimate for a month from now might be 15%.  If GDX leverages that kind of gold selloff by2x to 3x, that implies a more-dire correction of 30% to 45%.  30% total is certainly possible in this seasonalplunge, but 45% is excessive.  Remember thisbull’s prior GDX corrections averaged 36.5%.

A 30% GDX correctionwould bash the major gold stocks back down to $31.14.  If that comes to pass, so far the gold stocks have only seen half their correction. Odds are GDX will decisively bottom somewhere around 25% to 30% belowearly August’s major upleg peak.  Whilepainful for those trapped in it, this is really exciting as corrections yieldthe best buy-relatively-low opportunities seen within ongoing bull markets!

All bull markets naturallyflow then ebb, taking two steps forward before retreating one step back.  Their price action gradually meanders around uptrends.  This normal upleg-correction pattern keepssentiment balanced, extending bull markets’ longevity.  And it is a huge boon for traders, offering excellentmid-bull opportunities to buy relatively low before later selling relativelyhigh.  That greatly expands bulls’ potentialgains!

So I’m eagerly awaitingthis correction’s bottoming to aggressively redeploy in fundamentally-superiorgold and silver stocks at lower prices before their next major upleggets underway.  I’ll use this excellentrGDX indicator in concert with others to decide when high-probability-for-successbuying opportunities are returning. Actively trading gold and gold-stock bulls requires study anddiscipline, but multiplies your wealth fast.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows.  We layered into dozens of new positionsbefore gold stocks grew too overbought, which were stopped out recently at hugerealized gains running as high as +199%!  Our subscribers multiplied their wealth withinmonths.

To profitably trade high-potentialgold stocks, you need to stay informed about their technicals, sentiment, andfundamentals.  And what is moving gold,their dominant primary driver.  Our popularnewsletters are a great way.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Correctionsare the time to do your gold-stock homework, preparing to redeploy as they pass.

The bottom line is goldstocks are still correcting after soaring to seriously-overbought levels whentheir last upleg peaked in early August.  The deceiving high consolidation after thatfailed decisively this week when GDX shattered its 50dma, proving this sector’scorrection is alive and well.  Only about15% so far, it is likely to extend to 25% to 30% before overbought technicalsare worked off and sentiment is rebalanced.

Seasonality is likely toexacerbate this necessary selling over the coming month, which is gold stocks’biggest seasonal plunge of the year.  Thesetailwinds pushing this sector lower in concert with normal correction dynamicscould accelerate this selloff into finishing its vital mission sooner.  That will be the time to aggressivelyredeploy in beaten-down gold stocks, buying great miners at relatively-lowprices.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2019 Zeal Research ( www.ZealLLC.com )

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.