The Case For A Bottom In Gold Miners

GoldMinerLOC

I am not trying to predict the future, but I am going to give an argument for why gold miners might finally be worthy of capital investment…

Objectively, the gold miners (and related instruments) have been the worst investment of 2013. Sentiment is at historic extremes, but that doesn’t mean people immediately want to buy something. The momentum is strongly downward on the daily, weekly, and monthly charts, and earnings have been lackluster. However, at some point the market prices everything in and the selling becomes saturated.

Looking at the last 4 year cycle on a chart, gold mining stocks have made almost a perfect arc…exactly what a cyclical sector should do:

May 9th GDX Arc

In the context of the entire bull market in gold, the mining stocks are now sitting at the monthly 61.8% Fib retracement and we have recently witnessed the highest volume in history:

May 9th GDX Monthly

Breaking down the yearly cycles, they have formed a perfectly logical formation as they perform a 4-year “bounce” that peaked past the midpoint when gold also peaked. That makes the 4-year cycle right-translated and therefore these lows should hold above the 2008 lows:

May 9th GDX 4 Year

Upon closer examination of this most recent yearly cycle, we see that gold miners perfectly completed their 4-year cycle with an expected left-translated yearly cycle and extremely left-translated intermediate cycle that topped in only 4 days. That gave this intermediate cycle almost 6 months of freefall time into the recent gold crash:

May 9th GDX Yearly Cycles

In retrospect, this has been an amazingly orderly right-translated 4-year cycle in mining stocks that likely completed with the crash in gold. There was no manipulation or foul play, it was one of the most technically beautiful sequences I have ever seen on a chart.

Price has once again powerfully climbed above the 20 MA with a backdrop of record negative sentiment and small-spec positioning in gold. I firmly believe that there is plenty of rocket fuel as saturated sellers will be forced to cover and investors seek fresh gains at the beginning of a new 4-year cycle. As always, manage risk appropriately and have a predefined exit point before making any trade.

Good trading all.

Steve Chapman, TRI

Disclosure: Long EEM, OIH, URA, VNM, GDX


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9 comments on The Case For A Bottom In Gold Miners

  1. Power Corrupts
    May 9, 2013 at 11:48 AM (12 months ago)

    Steve, Any thoughts on the lack of a PSAR flip (yet) for GDX?

    • Steve Chapman
      May 9, 2013 at 12:20 PM (12 months ago)

      If we get a swing high tomorrow then it was most likely the Wave 2 up of the larger Wave 5 down and I will close the position for risk purposes.

  2. Robin
    May 9, 2013 at 1:37 PM (12 months ago)

    Steve,

    It sounds like you are going to exit this trade before the stop is hit? Is that true, and why would you go long with a stop and then exit before it’s even hit.

    Unless you have a crystal ball how can you be be certain that your first choice was not correct.

    We are still way above 28.62, but my stop is lower because I bought todays dip.

    Thanks.

    • Steve Chapman
      May 9, 2013 at 2:10 PM (12 months ago)

      Because with the move in the Yen today the dollar might be in a brand new intermediate cycle. Nobody knew that information yesterday, and that is why as traders we can never get married to an outlook or we will lose big money. I will explain tonight.

      You have to go day by day in this game or it will eat you alive. It is the reality of the profession. It would be nice if it was easier but it is designed to take your money from you.

  3. Robin
    May 9, 2013 at 2:13 PM (12 months ago)

    Steve,

    Thanks, and I am looking forward to the report.

    • Steve Chapman
      May 9, 2013 at 2:27 PM (12 months ago)

      No problem. Trading can sometimes be the equivalent of going to the store and finding the perfect clothes but then realizing that they have every size but yours and you end up leaving empty-handed.

  4. wavesofcash
    May 10, 2013 at 2:11 PM (11 months ago)

    In your red and green cycle chart you showed a tiny green strip and said “and extremely left-translated intermediate cycle that topped in only 4 days” That 4 day cycle looks like it does not even belong in that chart. How can a 4 day cycle be mixed in with a lot of 4 year cycles? That little tiny cycle makes no sense to me. There are 7 lows after that (the 7th the possible real new low right now). Why was that 4 day one chosen instead of one of the other 7 lows?

    • Steve Chapman
      May 10, 2013 at 2:34 PM (11 months ago)

      That chart was showing how many days from the intermediate cycle low (black arrow) that price rose until it reached the intermediate cycle peak (the green area), and then how many days after that were spent in decline (the red area) until the next low (black arrow). Those 4 days did not encompass an entire cycle in itself. From the intermediate cycle low in November it took only 4 days for the cycle to peak (extremely left-translated), and that is why we have witnessed one of the largest freefalls in history over the last 5 months.

      Good question, and I apologize that the chart was misinterpreted.

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