, Investing Strategies

Is this the bottom for the gold miners?

February 5, 2016 / by TradeSmith Research Team

Another week in the markets is nearly in the books. While there continues to be plenty of Sturm und Drang, not a lot has actually changed.

This week I’ll review the major market issues briefly and then share my thoughts (and increasing interest) in the gold miners.

The S&P 500 continues to look shaky, having stopped out back in August and not yet triggered a Re-Entry Rule. Its Smart Moving Average continues to roll over.

On the other hand, it is sitting on strong support, as indicated by my new favorite indicator Volume-at-Price (VAP):

The most notable major market move this week was the breakout in US Treasuries:

Anyone that thinks that higher interest rates (and lower Treasury prices) are dead ahead needs to meditate for a while on the above chart. Treasuries are breaking out to new highs and yields are headed to new lows.

The VAP chart on Treasuries supports higher prices as well:

Treasury prices are breaking out to the upside off of massive price volume support between 120 and 127.

The stock market trending down and Treasuries trending up doesn’t paint a pretty picture, I must admit.

It may be time to head for the hills … the gold hills.

In spite of the recent downturn in the stock market, precious metal mining stocks have actually been on the rise. In fact, GDX, the gold miners ETF, is up over 30% off of its recent low of $12.40 to over $16.00.

Oh my gosh … it’s about to get away from us!

Well … not exactly. That recent 30% rise doesn’t look quite as compelling in the context of the last 10 years:

But seriously, the time could be ripe for a little bit of prospecting in the gold mining sector. There are some encouraging recent signs. We just need to make sure that we’re being smart speculators. Let’s take a deeper look.

One of the reasons that I’m cautiously optimistic on the gold miners is because of the major Volume-at-Price supports below the recent lows. Check it out:

You can see the massive volume supports at the recent lows both in time and at price. The peak in the gold colored indicator on the left hand axis of the chart indicates that a lot of shares changed hand at the recent lows. That massive volume around $12 – $14 can also easily be seen in the red and green time volume bars below the chart.

Something cathartic has been taking place at these price levels … and for the time being, it looks like the break is to the upside.

That said, we want to be extremely careful about trying to jump the gun in a big way.

In full disclosure, my Re-Entry Rule indicator has not yet triggered a re-entry on GDX. Going back to our short term picture of GDX we can see that we’ve had a strong bounce in GDX off of the lows but the Smart Moving Average is still trending down, though its downward descent is slowing and it’s leveling out some.

That said, I know that some of you will be tempted by the recent rise in GDX, so I want to make sure that you’re judicious in your speculations.

One way to do that is to make sure that you take a position size that is right for you.
The current VQ% on GDX is 36.5%. It’s volatile. If you’re willing to LOSE up to $1,000 in GDX, you can use a 36.5% trailing stop at today’s price and invest $2,740 in GDX today. If GDX falls 36.5%, your $2,740 investment in GDX will be down $1,000.

That is an intelligent speculation. You know what your risk is and you are comfortable with it.

On the other hand, the absolute worst thing you could do right now is to take fret that GDX is about to take off for the races and leave you behind and to therefore take a huge position in GDX at these “once in a lifetime low prices.”

I can tell you from experience this is about the tenth time I’ve seen these “once in a lifetime low prices.”

Another approach to making an intelligent speculation in the gold miners is to drill down into the component stocks of GDX and see which ones are starting to shine.

I’ve done just that for you.

I looked at all of the 33 mining stocks in GDX. 11 of them are not stopped out according to my SSI system. Out of these 11 strongest stocks in GDX, the one that stood out to me the most is an Australian gold miner – Evolution Mining (EVX.AX).

Evolution mining has been trending up nicely for over a year now. It has strong support from its Smart Moving Average and it has bounced off of the Low Risk Zone several times already in the past year.

I know nothing about this stock other than that it’s performing well in a beaten down sector that is starting to show some life. I bring it to your attention for your further consideration.

So yes, the gold miners are starting to look interesting. Just don’t get greedy. You can: