Gold Stocks' Upleg Intact
Adam Hamilton
Archives
Jan 22, 2021
The gold miners' stocks have had a wild ride this month, surging then plunging. After hitting new upleg highs, the leading gold-stock benchmark collapsed in a sharp drawdown. That gutted bullish sentiment, bringing back worried bearishness. But despite that big swing, the uptrend of gold stocks' young upleg remains intact. This sector is still marching higher on balance with gold, a bullish omen for further gains.
Price action in the financial markets is never linear for long. Asset prices perpetually flow and ebb, often chaotically from day to day. That reminds me of Mark Twain's famous quote, "If you don't like the weather... just wait a few minutes." Volatility is a constant companion in the markets, forever toying with traders' emotions. But over longer-term time horizons, this incessant daily noise tends to form tradable trends.
Keeping those in perspective is essential to achieving trading success. Viewing price action in broader trend terms rather than fixating on big daily swings greatly moderates greed and fear. Letting short-term volatility stoke those dangerous emotions leads to buying high and selling low, fueling losses. Borrowing from Ephesians' wisdom, traders can't be "tossed to and fro, and carried about with every wind" of price action.
January's big gold-stock volatility must be considered as a whole to be properly processed and gamed. The leading and dominant gold-stock benchmark and trading vehicle is the GDX VanEck Vectors Gold Miners ETF. This week its $16.3b in net assets commanded a staggering 64% of all the capital deployed in all the American gold-stock ETFs! GDX's wild price action this month highlights this sector's serious swings.
GDX blasted 6.9% higher on 2021's opening trading day of January 4th, hitting major new upleg highs which really excited traders. But later that week on the 8th, GDX plunged 4.8%. Another week after that on the 15th, it dropped another 3.1%. Then in the middle of this week, it surged 3.4% higher. This has to seem schizophrenic to traders fixating on day-to-day price action, violently capricious and excessively risky.
But when these sharp swings are considered together, they continue to carve an uptrend in gold stocks' latest young bull-market upleg. That is readily apparent in this GDX chart encompassing the past couple years or so. Pay particular attention to the past couple months' price action, where big volatility has been giving myopic traders fits. Gold stocks are actually marching higher on balance, which is certainly bullish.
Gold stocks' powerful bull market in recent years is a case study in contrasting price action. Massive uplegs rocket higher, rapidly multiplying traders' capital. Gold stocks' last one peaked in early August at enormous 134.1% GDX gains in just 4.8 months! But after shooting parabolic, this sector was extremely overbought riddled with excessive greed and euphoria. So a healthy rebalancing correction was necessary.
That indeed unfolded over the next 3.6 months into late November, where GDX fell 24.9%. Both this latest upleg and correction proved very volatile within their trend channels rendered here. Gold stocks' high inherent volatility made for big and sharp countertrend moves in each. This sector advances in line with its prevailing trends, then retreats. This two-steps-forward-one-step-back meandering is ubiquitous.
It also applies to bull-market uplegs due to the scaling fractal nature of the markets. Like the broader bulls containing them, individual uplegs flow and ebb. Gold-stock prices forever rise and fall, seemingly chaotically as apparent in this GDX chart. But considered together these daily swings gradually coalesce into uptrends, series of higher lows and higher highs. These are the backbones of wealth-multiplying uplegs.
Our current one stealthily started marching higher in late November. Gold-stock sentiment was bearish then, drenched in fear after a multi-month correction. But gold miners' stocks are ultimately leveraged plays on gold, which overwhelmingly drives their earnings. And gold's own parallel correction that forced gold stocks' was maturing, growing to bull-market precedent. That green-lighted a new gold-stock upleg.
The best opportunities to buy gold stocks at relatively-low prices within ongoing bulls come when corrections are bottoming. So that very day when GDX closed at $33.42, we started layering in new long-gold-stock trades to ride their next major upleg. Before that we had abstained from deploying any capital in gold stocks since June. This sector was starting to get overbought then, so we let our existing trades ride.
They had been largely added between March to May around and after the bottoming of gold stocks' last correction. They were ultimately stopped out in July and August at huge absolute realized gains. Across 17 gold-stock trades in our weekly newsletter, those averaged +81.3%. Another 9 in our monthly ended up averaging +83.6%. And those annualized to stellar averages of +303.9% and +334.9% respectively!
It pays big to buy relatively-low after gold-stock corrections mature, then later sell relatively-high when the subsequent uplegs mature. Understanding when these key opportunities occur, and having the mental toughness to suppress greed and fear to actually buy and sell gold stocks in opposition to the herd, totally depend on maintaining perspective. That means processing gold-stock daily volatility in broader trend terms.
In late November no one knew exactly when or where gold stocks' last correction would bottom. But we could know that critical turn was increasingly likely based on both bull-to-date precedent and prevailing sentiment. Buying low and selling high is a probabilities game, requiring trading decisions to be made in real-time before upleg-correction trend reversals are decisively known. That certainty only comes with hindsight.
Even if those parallel gold and gold-stock corrections hadn't been quite over yet in December, the odds of new uplegs starting to power higher were very favorable. So we've kept layering in new gold-stock and silver-stock trades ever since then, trying to buy in relatively-low for a new-upleg campaign. Those trades would've straddled the ultimate correction bottoming had it come a little later, which is the optimal strategy.
But instead the gold stocks started powering higher on balance in an increasingly-solid new upleg, which is readily evident in their GDX benchmark. Gold-stock prices are still relatively-low early in young uplegs before most traders recognize them. That usually happens months later, leading to big capital inflows accelerating gold stocks' upside as traders chase those gains. We want to be fully deployed well before that.
By December 7th GDX had surged 9.2% to $36.50, which was nice but inconclusive. Sharp rallies are common within gold-stock corrections, like GDX's blistering 13.4% seven-trading-day surge straddling the early-November US elections. But that election-spike downtrend breakout soon proved false, because the gold and gold-stock corrections hadn't matured yet. In mid-December, GDX retreated 6.1% to $34.29.
If that held, it would prove a higher low well above November 24th's $33.42. And it did! GDX blasted up 8.7% over the next three trading days to $37.29 on December 17th. That was a higher high over the previous $36.50. An uptrend is just a series of higher lows and higher highs, and uptrends make up bull uplegs. So the new-gold-upleg-underway thesis was looking better as GDX's uptrend kept solidifying.
But upleg advances always happen in that flowing-and-ebbing fashion, taking two steps forward before retreating one step back. So GDX dropped another 5.4% to $35.28 on December 22nd. That made for its third higher low since late November, an encouraging sign. The gold stocks ground sideways into year-end, but a definite gold-stock uptrend had formed. But it still had a vexing major technical problem.
By that point GDX still hadn't broken out above either its recent correction's downtrend resistance line or its 50-day moving average. 50dmas are often strong resistance zones within ongoing corrections. So despite gold stocks' higher lows and higher highs by then, technically GDX also remained trapped within its correction downtrend. Thus considerable risk remained that gold stocks' correction lows had yet to be seen.
But this sector's technical picture radically improved on January 4th, 2021's opening trading day. GDX blasted 6.9% higher to $38.51 that day, which was its third major higher high since early November. But much more importantly, that was a major upside breakout! GDX simultaneously shattered both those correction-downtrend and 50dma resistance zones. Then GDX held those new highs for four days in a row.
That was the strongest technical evidence yet that gold stocks' last correction indeed bottomed in late November, so a new gold-stock upleg was underway. With its uptrend becoming more apparent, gold-stock enthusiasm was mounting. But that was soon gutted on the 8th, when GDX plummeted 4.8% back to $36.52 in a serious down day! While gold stocks' uptrend hadn't been broken, that really spooked traders.
That happened to be on Jobs Friday, the day the official US monthly jobs report is released. That can really move gold, and the gold stocks mirror and amplify their metal's fortunes. Gold plunged a massive 3.5% that day, so GDX's 4.8% sympathetic loss was fairly minor. Normally this leading gold-stock ETF tends to leverage material gold moves by 2x to 3x, so that 1.4x was actually restrained. Why did all that happen?
A week ago I wrote an entire essay analyzing gold's Jobs-Friday plunge, which is really important for all gold-stock speculators and investors to understand. Basically speculators' bullish positioning in highly-leveraged gold futures was excessive. So after the psychologically-heavy $1,900 level failed overnight before that jobs data, cascading selling erupted as a long-festering gold-futures-selling overhangwas unwound.
The resulting gold-stock carnage was merely collateral damage. But big GDX up days and down days really spark surging emotions, greed and fear respectively. Traders caught up in day-to-day price action see big swings and tend to extrapolate those moves as likely to persist indefinitely. So they succumb to greed to buy relatively-high after big daily rallies, and are overcome with fear to sell relatively-low after big drops.
And the latter is exactly what happened in the week following gold stocks' Jobs-Friday plunge. Over the next week into January 15th, GDX bled another 5.5% to $34.51. That extended its total selloff since 2021's opening trading day to 10.4% in nine trading days. Technically that lower low broke the gold-stock uptrend's lower support line, which had been steep exceeding the rising slope of GDX's 200-day moving average.
But again focusing on the broader gold-stock trends instead of just January's sharp drawdown puts things in superior perspective. Gold stocks' young upleg wasn't in jeopardy, so there was no justification to being scared into selling relatively-low. While $34.51 was under the previous GDX low of $35.28, it was still well above the last correction's late-November bottoming at $33.42. GDX's uptrend was just redrawing.
Uptrends are formed by parallel lower-support and upper-resistance zones, which are drawn as best-fit lines. These aren't static, but gradually shift to accommodate the great majority of the chaotic day-to-day GDX price action. So especially earlier in uplegs when they remain young, uptrend slopes are redrawn as new data comes in. Those uptrends tend to moderate after their initial sharp surges, getting shallower.
This process of continually adjusting to the data reminds me of video footage showing how computers in autonomous cars process the real-time incoming camera data. They are constantly redrawing boundary lines showing where road edges and painted lanes are. These ever-shifting roadway paths the cars are following are analogous to trends. Best-fit upleg uptrends are fine-tuned and adjusted based on price action.
Although shallower than it was a week earlier, gold stocks' young upleg remains very much alive and well. Now its uptrend is paralleling GDX's 200dma rather than overtaking it, which is much more sustainable. If an upleg surges too far too fast it generates too much greed. That pulls forward too much future buying, sucking in all interested traders' capital too quickly. When that buying firepower is exhausted, uplegs fail.
So January's sharp gold-stock selloff was essentially a drawdown within an ongoing uptrend. Although it forced a redrawing of GDX's uptrend channel, these adjustments are typical in young uplegs. The gold stocks are still carving higher lows and higher highs on balance, which means their young upleg remains intact. These recent lows offer great opportunities for traders to aggressively add gold stocks relatively-low.
At best as of January 4th, GDX's young upleg has only climbed 15.2% over 1.3 months. That is nothing in this sector, where this bull's previous four uplegs averaged massive 99.2% gains in GDX terms! There is no reason gold stocks can't double again this time around, as their fundamentals are incredibly bullish at these high prevailing gold prices. So it's prudent to keep layering in new trades with gold stocks still cheap.
With gold's own outlook really bullish on epic central-bank money printing, dangerous bubble valuations in the stock markets, and radical underinvestment with sub-1% overall American portfolio allocations, gold stocks still have huge upside potential. As their gains mount, other traders will catch on and start chasing this sector. That will really accelerate this upleg, closing the early-upleg window to buy in relatively low.
The ideal time to get deployed is before most other traders figure out a major new gold-stock upleg is underway. So we've continued to gradually layer in new trades in fundamentally-superior gold stocks and silver stocks since late November. The current count is up to 14 new trades in our weekly newsletter and 6 in our monthly. Their formats have recently been updated too, increasing their focus on individual-stock analysis.
At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. That's why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!
To multiply your wealth trading high-potential gold stocks, you need to stay informed about what's going on in this sector. Staying subscribed to our popular and affordable weeklyand monthlynewsletters is a great way. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what's going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off sale! Early in a young gold-stock upleg is a great time to get deployed.
The bottom line is gold stocks' young upleg remains intact despite January's sharp selloff. While that did redraw and moderate GDX's uptrend, this leading sector benchmark is still carving higher lows and higher highs on balance. Unless that changes, there's no reason to doubt this upleg. That means any pullbacks are opportunities to aggressively add positions in fundamentally-superior gold stocks at relatively-low prices.
Uptrends are often in flux, with their best-fit support and resistance lines gradually shifting to encompass evolving day-to-day price action. Shallower upslopes are more sustainable, giving uplegs more time to ramp up and attract in capital. Gold-stock traders need to process gold-stock price action in the context of trends, not let big daily swings overly influence their outlooks. Maintaining perspective is essential to success.
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Jan 22, 2021
Adam Hamilton, CPA
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