Domestic indexes took a breather on Wednesday as commodities broadly slid lower in overnight trading after economic data out of China caused concerns over subdued demand. China’s CPI rose 5.3% in April on a year over year basis while wholesale inflation climbed 6.8%, leading investors to believe that more monetary tightening may ensue. The euro and the Australian dollar took a beating versus the dollar as equities traded modestly lower, while interestingly enough the yen rallied versus the dollar at the market open. Gold slid lower just under $1,500 an ounce, while silver retraced lower as well towards the $35 an ounce level. Crude oil also continued to trade lower following this week’s margin hikes and dipped below $100 a barrel.
The price of gold has been steadily climbing since forever ago, but the shiny metal’s most recent run-up has brought our attention to gold mining equities, which have been under-performing as of late. Consider the performance of GLD, which tracks the spot price of gold bullion, versus GDX, which tracks an index of gold-mining companies across multiple market-cap levels [try our Free Head-To-Head Tool]. Year to date, GLD has gained just about 6%, while the miners in GDX have lost 9%. Both ETFs are without a doubt in strong long-term uptrends, since their performance over the past 2 years is quite impressive, with GLD returning over 63%, and GDX gaining around 50%. Thanks to this divergence in performance, investors could be presented with an interesting trade opportunity over the next couple of weeks.
Technical Analysis: Market Vectors Gold Miners ETF (GDX)
GDX has been in a strong uptrend since the end of October in 2008 [see GDX holdings]. Consider the daily chart for GDX below and notice how the fund bottomed out near $15 a share just a few months after trading below its 200 day moving average (yellow line).
After bottoming-out an rising back over its 200 day moving average, GDX has since been in a stellar uptrend, clearly bouncing off the yellow-line and sustaining its march higher. Assuming this uptrend remains intact, the recent underperformance of GDX relative to the price of gold could be a signal for one of two things. Either its signaling a buy opportunity for GDX, assuming gold will sustain its robust uptrend and the price divergence will correct itself, or its a signal of caution for the price of gold, as the equities price action sometimes anticipates declines in commodity prices [see GDX Fundamentals]. Purely based on technical analysis, GDX is at an attractive entry point for swing-traders looking to ride a bounce higher to $60 a share and perhaps higher.
Consider the 1-year daily chart for GDX below to gain a more focused perspective on the uptrend at hand. The 200 day average is a clear indicator of support over the longer-term, and currently GDX happens to be trading just under it.
GDX must establish support above $55 a share in the coming days if we are to reasonably expect a bounce to at least $60 a share. If selling pressure continues, GDX could decline below $54 share, and a daily close below the $52 level would call for re-evaluation of the current uptrend. Assuming the uptrend remains intact, the next significant resistance for GDX conservatively comes in at around $62.50 a share, while profit taking may also be likely at the $60 mark [also see The Definitive Gold ETF Guide].
As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: Author holds June 60 Call.