The Junior Gold Miners ETF Has Bottomed; It's Time to Add

 | Feb 08, 2016 | 10:10 AM EST
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The gold market has been around for centuries. Probably everybody follows it to some degree, like the price of gasoline. If you live in Switzerland or India or China, you may be following it even closer.

The gold market captured the American public's attention in the late 1970s, when some people hoarded the shiny Krugerrand or Maple Leaf and feared the worst, while others became scale-up sellers of their high school rings and silver pieces they hated to polish.

As gold approached $800/oz. it became dangerous to wear bling on the subways. Today, fancy electronics are the grab-and-go high-value items of choice. Times change.

I could take shortcuts in my analysis, but it has proven its mettle over the years, so why change? Some analysts just watch the London gold fix, but there is so much more to the market. With the London market, we don't know the volume of trading. Volume is a great confirming indicator for chartists. Mutual funds, futures, ETFs and ETNs can give us volume.

The behavior of the gold mining stocks is also important. Imagine that you have analyzed the fundamentals for gold and determined that it should rise in price. Because the timing of this rise (and any rise for that matter) is uncertain, you probably don't want to buy futures or options.

Your first choice should be to buy shares in the best run gold mining companies. These miners should benefit when the price of gold rises. If we knew exactly when gold would rise, we could buy futures or options and get a faster, leveraged payoff.

Instead, money comes into names like Agnico Eagle Mines (AEM) first (where the On-Balance-Volume line turned up back in September). When we are really sure that a gold rally is underway, we tend to move into smaller and more volatile gold names.

Speculative names can have some big percentage moves to the upside, but they tend to move later. The Market Vectors Junior Gold Miners ETF (GDXJ) is an easy way to watch this part of the precious metal market.


This one-year daily chart of GDXJ, above, is interesting, as the turn to the upside has been developing for months. The chart of GDXJ bottomed in July, as the broader stock market weakened.

The On-Balance-Volume (OBV) line moved mostly sideways, but turned up clearly from mid-January. Since July, there has been a bullish divergence between the price action and a rising momentum study -- note the higher lows in July, November, and then January. Also, prices are now above both the 50-day and the 200-day moving averages.


This longer-term chart, above, of the GDXJ shows that this ETF does have something to reverse (a key ingredient of reversals), after declining to $20 from $160. Notice the heavy volume of trading from late 2014, with prices going sideways.

Heavy volume and sideways price action tells us that aggressive sellers are meeting equally aggressive buyers. In the lower panel, the Moving Average Convergence Divergence oscillator is making its way to a buy signal by soon crossing above the zero line.

Bottom line -- short-term and long-term, the GDXJ has bottomed, in our opinion. If not long already, we would go long at current levels and add on a close above $24; $19 is probably a good risk point.

A rally to the $40-$50 area is our first upside price target, as gold bullion could rally to $1,400 in the weeks and months ahead.



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