Sunday, May 13, 2012
www.scottpluschau.blogspot.com
Since I posted earlier today some commentary on global "Exchange Traded Funds", I thought it would also be a good time to share analysis on the Gold Miners ETF. I often get asked questions on mining stocks since I frequently post on the precious metals futures. This prior blog post of mine on the gold miners ETF is definitely worth a review here: http://scottpluschau.blogspot.com/2012/01/gold-miners-are-showing-threatening.html
In that post I discussed in detail the current pattern that was developing in GDX "prior" to the breakdown. What I mentioned then was that GDX formed a "Broadening Top" formation, and in my experience a broadening top could be either a continuation or a reversal pattern. However, the breakout was likely to be a strong signal.
There is no reason from my "traders" perspective to be buying gold miners at this time. I might think differently if I was focused on the long term, or if I liked the fundamentals, but by all means do whatever you think is right for you.
There was a "Balance Area" on the daily chart that I highlighted with a blue rectangle just prior to the breakdown. Once the lower trendline support broke off the broadening top formation, it was time to sell in my opinion, or step aside and wait for a reversal signal or a new bullish pattern to develop in order to consider a buy. Buying in here right now may turn out to be a great idea, but in my opinion it is high risk for a trader. On a side note: adding to a losing position is a good way to destroy a trading account.
I believe the greatest myth in the history of "trading" is to "buy low and sell high". It's hard not to believe that is the way to success since in theory it makes sense. The problem with this being ingrained in our minds is because what appears to be a low price today may ultimately in 52 weeks from now be the "52 week high". On that one year chart later you could have been buying high when you had meant to buy low.
When trading I like to buy high, and sell higher. Likewise I want to sell low, and buy it back lower.
Buying low because it is "too low" off the breakdown in a broadening top pattern such as this one in the gold miners is like ignoring a posted avalanche warning at the base of a mountain before a climb.
Let me give another example. If you are afraid to buy because something is at a "52 week high", due to this myth of "buy low and sell high", and thus you feel that you should sell short, or if you were long to take profits... what are you going to do when in 52 weeks from now, what was once seen as too high becomes the "52 week low"? Looking back in this scenario would in fact be "selling low". What seemed like the obvious thing to do can turn out to be the complete opposite of what was initially intended.
Does this mean that GDX is going to head south and is nowhere close to a bottom? No, this is not what I am saying, but the odds are good that it isn't. Knock yourself out if you are buying in here and convinced that down the road this is a great bargain. Personally, I have no issues paying up for anything by waiting for a confirmed buy signal. In the meantime I would rather preserve my capital.
Trading in my opinion is all about "probabilities" and it is critical to identify a trade location that puts me on the right side of the "order flow" in the timeframe I am working with. I have no edge in using my methodology for "guessing", "hoping", or "betting" that a market is at bottom.
In conclusion, I want the momentum of the market and the forces of supply and demand on my side at all times as best as I possibly can when trading.
(Click on chart to expand)
One other chart that is a concern for the mining crowd is the Metals and Mining ETF symbol XME. What I have pointed out on the chart below is a potential nasty Bearish "Head and Shoulders" pattern brewing. I have often said that failed patterns are in fact the strongest signals, so I would keep an eye on this one.
If there is anything to hang a hat on for the bulls its that the "Measured Rule" target just being reached on the Junior Gold miners ETF symbol GDXJ off a lethal "Descending Triangle" pattern. This does not mean that supply can't continue, but it has been a good flush, and it is amazing how often the measured rule turns out to be the end of a good run.
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