In order to work off the bullish sentiment that was at parabolic extremes, gold is required to spend a reasonable amount of time in relation to the prior 34-month move to wash out the sentiment and create a strong pivot bottom. While this continues, the gold stock index has taken it on the chin as money rotates out and into other hot areas like technology and the Internet 2.0 social media boom. To wit, the GDX exchange-traded fund (ETF) peaked out last fall around 67, and current trades under 47 as of this writing.
However, there may be a silver lining developing in those dark mining stock clouds very soon. It does appear that we are in the fifth and final wave of this pessimistic decline in gold stocks per my GDX ETF chart below. A typical bottoming pattern ends after five clear waves have taken place, and in this case I have targets between $43–$47 per GDX share as a likely pivot low in gold stocks. Contrarian investors may do well to begin picking the better names in the sector and "scaling" in over the next short period of time.
Gold itself has recently corrected from $1,793/oz to $1,620/oz in the last several weeks. This has spooked the crowd out of gold and put further pressure on gold mining stocks as well. Should gold hold the $1,620/oz area and rebound past $1,691, you will see gold stocks take off just ahead of that and these 43-46 levels on the GDX ETF may provide very strong returns to investors with the iron stomachs.
The best way to make money long term in the market and to grow your capital is to develop a method where you can define your risk levels within reason near the apex of a downside move, and then scale into that final apex and catch the rally on the upside. This is difficult to do but at my ATP service we have developed a strong methodology that takes advantage of "herd behavioral characteristics" and of typical panic selling and panic buying to do just the opposite. We have not yet bought into the gold stock sector, but I assume fairly soon we will be dipping our toes in the water while others have all rushed out of the sector right near the apex lows.
David Banister, Technical Traders
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