Gold stock upleg accelerates

At that major bottoming, the trading books in our newsletters were full of fundamentally-superior gold miners’ stocks. We added and recommended them leading into that at low prices, when they were deeply out of favor. A few weeks later, I wrote another essay analyzing the latest quarterly results from the mid-tier gold miners. They are in the sweet spot for stock-price appreciation potential when gold powers higher.

Still out of favor, they had just reported one of their best quarters ever. Their production growth was way better than their larger peers’. And thanks to the still-high prevailing gold prices despite its last correction lingering, these elite gold miners reported record revenues, earnings, operating cash flows, and cash treasuries! Their fundamentals are outstandingly-bullish yet their stock prices continued to mostly languish.

But the gold stocks were stealthily climbing on balance, as evident in their leading benchmark the GDX VanEck Vectors Gold Miners ETF. A couple weeks later in still-another essay, I explained why another gold-stock upleg was underway. GDX had poked its head above its correction-downtrend resistance and its 50-day moving average. And its technical performance since bottoming looked very young-upleg-like.

My young-upleg thesis advanced in early April was met with a lot of skepticism and even hostility. From the feedback I got, it seemed like most traders were convinced the gold stocks still needed to drop much lower before a new upleg could get underway. Sentiment staying bearish is typical after any bottoming, as traders extrapolate recent conditions out into the indefinite future. Their festering doubt was a bullish sign.

And that contrarian new-upleg-growing analysis has since been vindicated in spades. In the past couple weeks, GDX has blasted sharply higher cementing its strong uptrend. Naturally this accelerating gold-stock upleg is working wonders for sector psychology, attracting traders back to this battered sector to chase those mounting gains. That has shifted the tenor of what I’m hearing from speculators and investors.

A couple weeks ago, that was mostly “Adam you are wrong, the gold-stock correction is very much alive and well and will pummel this sector much lower.” Few were bullish like they should’ve been when gold-stock prices were considerably lower. Now I’m largely getting “Did I miss this gold-stock move, is a selloff looming?” After such big-and-fast gains, traders fear this sector will soon roll over again into another selloff.

This latest GDX chart shows the recent blistering gold-stock surge, which decisively broke out above both this leading sector benchmark’s correction-downtrend resistance and 50dma. But despite rallying sharply, the gold stocks remain relatively-low. While they may be short-term overbought, they have a long ways to run until they get overheated enough to threaten this upleg. It still looks young technically, a bullish omen.

Bull markets power higher in a series of alternating uplegs followed by corrections. While the latter sure aren’t fun for traders not prepared for them, they are very important for bulls’ longevity. They are utterly essential for rebalancing sentiment, eradicating the excessive popular greed that flares late in major bull uplegs. That ensures the bull doesn’t burn out prematurely, sucking in too much future buying too soon.

By early March, GDX had corrected 30.5% in 6.8 months. That was necessary after this dominant gold-stock ETF had skyrocketed 134.1% higher in just 4.8 months out of last March’s stock panic! Such big-and-fast gains fueled extreme greed, which had to be bled away before this bull market could continue higher again. That upleg also left gold stocks extremely overbought, justifying a bigger and longer correction.

Its downtrend is readily apparent in this chart. Despite normal sharp countertrend rallies periodically, gold-stock prices generally kept grinding lower on balance. It looked like gold’s own driving correction had matured in late November, green-lighting a new upleg for gold stocks. And indeed GDX surged up 15.2% in 1.3 months straddling December. But unfortunately that young upleg was soon prematurely slain.

Gold was hammered by heavy momentum selling in both gold futures and gold-ETF shares. That fed on itself in a vicious circle, with lower gold prices sparking more selling leading to still-lower gold prices. The gold stocks and thus GDX had no choice but to be dragged lower with gold. That left this sector super-cheap relative to prevailing gold prices, with gold-miner valuations really low. They were truly screaming buys.

Technically a correction is a series of lower highs and lower lows. But those downtrends are punctuated by sharp countertrend rallies, which trick traders into staying deployed throughout those selloffs. These intra-correction surges are short-lived though, tending to last for a few weeks at most before they roll over into new lower lows. A good example of these deceptive surges happened leading into early November.

In just seven trading days, GDX rocketed 13.4% higher and broke out above its downtrend resistance. But that false breakout quickly failed, sending this ETF plunging back down 19.3% over the subsequent couple weeks or so to a deep new correction low. If this latest gold-stock rally since early March looked more like that, much shorter and sharper, caution would be warranted. But instead it is more upleg-like.

As of the middle of this week, GDX had powered 19.2% higher over 1.7 months or seven weeks! This kind of move off a major low is too big and too long to be a countertrend rally within a correction. It looks like the real deal technically, a mounting young upleg carving a beautiful series of higher lows and higher highs. This ETF’s major decisive breakouts above both its correction resistance and 50dma cement that.

Gold-stock prices’ upside momentum is accelerating, which is normal as herd psychology shifts. Back surrounding early March’s bottoming when gold stocks were much cheaper, the momentum traders didn’t believe a new upleg was increasingly probable. But GDX’s hard bounce since then has shattered their doubts, so they are rushing to redeploy and chase these big gains. This crucial upleg dynamic is self-feeding.

The more gold stocks climb on balance, the more traders want to buy them. The more capital they deploy in this sector, the higher gold stocks rally. That builds bullish sector sentiment, attracting still more traders to perpetuate this virtuous circle. Despite their sharp surge in recent weeks, gold stocks are scaling the proverbial wall of worry. Hence all the concern out there that gold stocks are overbought and need to sell off.

That may be true over the short-term, as bull-market uplegs naturally flow and ebb. They take two steps forward in surges, before retreating one step in healthy pullbacks. These alternating swings within uplegs also keep sentiment balanced, extending their lifespans. But there is no reason to worry that this entire young upleg is ready to fail and give up its ghost. It remains too small, too short, and far from overbought enough.

This secular gold-stock bull born back in January 2016 has already seen four previous uplegs. In GDX terms, they averaged massive 99.2% gains over 7.6 months each! Doublings are par for the course in this volatile high-potential sector, which is why contrarians put up with the serious corrections between these mighty uplegs. Climbing merely 19.2% so far over just 1.7 months, this upleg is nowhere near mature.

The fact traders are even worried about that proves this upleg remains young! Late in major gold-stock uplegs, herd sentiment is convinced gold stocks will rocket to the moon. Greed grows so extreme after typical huge upleg gains no one but the most-hardened contrarians even think major selloffs are possible let alone likely. So rejoice when you read bearish gold-stock commentary, as that doesn’t exist near toppings!

Another major reason this young gold-stock upleg is far from ending is GDX actually remains somewhat oversold even after recent weeks’ sharp surge! There’s a great indicator that quantifies overboughtness and oversoldness, or how fast and far prices have moved. It looks at GDX as a multiple of its underlying 200-day moving average. This is based on my Relativity Trading system, which has proven super-profitable.

Dividing GDX’s closing price by its 200dma every day and charting these results over time reveals when this sector gets overbought or oversold. I call this multiple the Relative GDX, or rGDX for short. Within ongoing secular bulls, it tends to form horizontal trading ranges. After major uplegs, gold-stock prices tend to peak near certain rGDX levels. And after major corrections, they tend to bottom around other ones.

This rGDX chart effectively normalizes gold-stock price action over the last couple years or so, rendering it in perfectly-comparable percentage terms off GDX’s baseline 200dma. The black 200dma is flattened to 1.00x, and GDX prices are expressed in percentages relative to it in the red line. An rGDX read of 1.10x for instance shows GDX is 10% above its 200dma, while 0.90x indicates this ETF is trading 10% under it.

Relativity trading ranges are based off the last five calendar years of data, and GDX’s from 2016 to 2020 encompassing this bull ran from 0.80x on the low side to 1.50x on the high side. Nearing and crossing that lower rGDX support zone, gold stocks are extremely oversold. After GDX has plunged far enough and fast enough to near 80% of its 200dma, odds are a major correction has run its course and is bottoming.

In early March when GDX’s recent extended correction ended, the rGDX closed at just 0.825x. While the actual bottoming day and level wasn’t knowable in real-time, such extremely-low rGDX reads greatly upped the odds that selloff was climaxing. That’s one reason I was pounding the table on buying dirt-cheap gold stocks then, when few others were bullish. We filled our newsletters with great gold-stock trades.

Conversely major-gold-stock-upleg toppings during this bull have happened at extremely-high rGDX reads up near 1.50x. GDX skyrocketed 151.2% higher in this gold-stock bull’s maiden upleg into mid-2016. That failed at extreme-overbought levels with the rGDX running way up at 1.567x. And when GDX shot 134.1% higher into last August, that latest gold-stock upleg died as the rGDX soared back up to 1.448x.

So upleg-slaying levels of overboughtness aren’t baked in until GDX soars high enough fast enough to catapult it about 50% above its 200-day moving average. Today we aren’t even close! As of this leading sector ETF’s $36.83 mid-week close, the highest GDX had been relative to its 200dma was only 0.988x. Anything under 1.00x technically remains oversold within this indicator’s longer-term upleg-correction context.

With GDX still under its 200dma, there is virtually no risk this young gold-stock upleg will soon fail. Heck, that prematurely-killed earlier upleg straddling December drove the rGDX to 1.055x. With GDX’s 200dma now running at $37.28, to stretch way up to a risky extremely-overbought 1.50x rGDX read would require GDX to soar to $55.92! That would extend its total upleg since early March to 81.0%, closer to precedent.

Since greedy euphoric upleg toppings can propel gold-stock prices higher than most expect, I don’t sell outright in them. Instead I ratchet up the trailing-stop-loss percentages on our open trades as gold stocks get more overbought. That way we can ride the uplegs as long as possible, maximizing our big gains from buying low around correction bottomings. And the sell decisions are mechanical, eliminating emotions.

With gold stocks so darned volatile, we start with very-loose 25% trailing stops when adding new trades. After major corrections mature and GDX gets extremely oversold, gold stocks are very unlikely to keep plunging. So those loose stops are like catastrophe insurance. But as uplegs mature, I start raising those trailing stops to 20%, 15%, 10%, and sometimes a tight 5%. That whole process is governed by the rGDX.

A neutral GDX trades at its 200dma, while an extremely-overbought one stretches 50% above it. So once the rGDX trades about 2/3rds up into that overbought area, I start preparing for a topping. I round that up to a 1.35x rGDX read. When gold stocks surge fast enough and high enough to push GDX 35% over its 200dma, it’s time to start getting wary and gradually tightening stops. Today that works out to a $50.33 GDX.

That is still another 36.7% higher from this week’s prices, way up there from here! It is pointless to worry about upleg-slaying levels of overboughtness until this GDX sector benchmark at least hits that 1.35x point. And these GDX targets are conservative, since its 200-day moving average climbs paralleling maturing gold-stock uplegs. 1.35x and 1.50x whatever GDX’s 200dma is a few months from now will be higher.

So despite this accelerating gold-stock upleg generating increasing interest, this move is nowhere near overbought in broader cycles terms. While gold stocks may pull back modestly for a few days after such a sharp surge, that is normal intra-upleg behavior. Uplegs gradually meander higher in uptrends, carving series of higher lows and higher highs. This one has a long ways to march yet before overboughtness nears.

Thus I reiterate what I wrote a couple weeks ago arguing that another gold-stock upleg was underway when GDX was 5.7% lower. If you are not sufficiently deployed in fundamentally-superior gold stocks to ride this sector’s next major upleg, the window to buy in relatively-low is increasingly closing. The biggest gains are won by those brave enough to buy in the earliest, before gold stocks get popular and greed flares.

While it wasn’t easy psychologically, we gradually filled up the trading books in our newsletters into and after GDX’s March 1st correction bottoming. Now our weekly and monthly respectively have twenty and ten open gold-stock and silver-stock trades. These hand-picked fundamentally-superior companies offering excellent production-growth prospects still have great upside potential, but they are rallying fast.

The bottom line is this young gold-stock upleg is accelerating. Speculators and investors are increasingly realizing that this sector’s powerful surge since early March is the real deal. So they are rushing to chase this momentum by redeploying in gold stocks. The more they buy, the faster the miners rally attracting in even more capital inflows. Yet in typical young-upleg fashion, bearish psychology lingers in a wall of worry.

Traders fear gold stocks have surged too far too fast, growing too overbought. While that may prove true in the very short-term, from a broader upleg-correction-cycle context this sector remains slightly oversold. The gold stocks have to blast far higher and multiply their gains before they get anywhere near upleg-slaying levels of overboughtness. So there’s nothing to fear technically here, pullbacks should be bought.

(By Adam Hamilton)