Icing the Miners (GDX,DB,QQQ)

We’d be remiss if we didn’t address the latest action in the precious metals, a move that resembles Azi Avoolae’s chilling dive off the Little Tree Raft into the Niagara Gorge in 1919.

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Old Azi was said to have debts he couldn’t pay.  Despite his apparent wealth, the man had taken a liking to the finest Germanic folk apparel – both men’s and women’s, they say – a development his family wouldn’t tolerate.

 

And he couldn’t afford.

 

As for gold, the metal’s latest swan dive does significant technical damage to the chart and likely puts it on a sideways to lower path for some time to come.

 

Let’s have a look at the SPDR Gold Trust (NYSE:GLD), the largest bullion ETF on the planet, and a bellwether of the status of gold amongst Main Street investors –

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The takeaway is like this –

 

  1. A three month declining triangle (in red) is a negative development, a matter of when, not if, a breakdown will occur. It’s evidence that the bulls are losing the ability to push back against the force of the sellers.  And in this case, the break came Tuesday of this week, when GLD succumbed to a violent three and a half percent Iroquois scalping.
  2. That puts the stock’s next line of support in the 115/116 range, where both of the long term moving averages are paired (blue square). How fast we get there, of course, is anybody’s guess.  There’s a good bit of ground to cover, and a lot of it happened in the past two sessions, meaning we could see a good measure of easterly bumping and grinding until we finally bottom out.
  3. We note also that RSI and MACD (in green) are bearish, but the former is closing fast on the oversold 20 line. Should we get there in the next few days, we might see a violent surge higher that could serve to recoup the latest losses.  As always, we’re dealing with a multi-factorial environment and moving targets.

 

All told, the picture for the precious metals is bad.  The drop in silver was gravitational, measuring some 15% from the latest top, against gold’s more subdued 8% decline.  The miners have taken the worst hit of the bunch, however, tumbling close to 25% from their last high in August and breaking a number of technically important thresholds.

 

Take a look here –

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This is the VanEck Vectors Gold Miners ETF (NYSE:GDX) for the last six months, and the carnage is apparent.

 

The bad news is the worst may be yet to come.

 

How’s that?

 

Well, first off, both RSI and MACD are trending below their respective waterlines (in green), a bearish indication unto itself.  But more than that, RSI is not yet near the oversold 20 marker, meaning we could see an appreciable decline before that level is triggered and meaningful buying returns.

 

Moreover, the break below the main support line (in red) was just sundered this week, indicating the selling is likely to continue.  But a potentially greater plunge could be in the offing if the neckline from the head and shoulders top marked in blue is cracked.

 

And that’s exactly where we sit at the moment.

 

The downside count for the H&S pattern would bring GDX as low as 20, in line with her long term moving averages, and considering the latest movements in the global currency markets, that’s precisely what we see occurring next.

 

The Dollar Trump

 

Forgive our use of cheap political imagery, but we do it for a reason.

 

The fate of gold and silver and the companies that mine them is in large part tied to movements in the dollar, which of late has seen a resurgence of strength on the back of weakness in currencies from all the major industrialized nations.

 

Dollar strength is good for the U.S. equity market and bad for commodities like gold, which is priced in dollars.  Every notch higher in the currency therefore tugs the precious metals’ price lower, and combined with increasing flows into the stock market, produces a knock-on psychological effect that pushes investors away from buying hard assets (like gold).

 

Gold and her precious metal cousins come to be seen as worthless, unproductive investments, while stocks take on a shiny, can-do glow.

 

And a glance at the current dollar chart indicates that we may be headed toward equity investment euphoria in very short order.

 

Have a look –

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The big news is the ascending triangle (in red) that will very shortly see a breakout above the upper resistance line and the long term moving averages bunched in the 96.30 region.  That’s a double break that should not be underestimated.

 

We would only add that the move is virtually guaranteed, not only because the pattern is extremely reliable, but because the moving averages have all begun to trend higher in the past few sessions (black enlargement), and because RSI is bullish and MACD just confirmed with its own bullish break above its waterline at the beginning of the week (in green).

 

Trades! New and Old!

 

Two items to bring to your attention before we proceed.

 

The first is a trade launched just two weeks ago in a letter called The NASDAQ Gets a Wedgie.  There, we recommended the purchase of a QQQ strangle that, to our chagrin, expired worthless last Friday for a loss of $0.37.

 

Next was last week’s trade from our letter entitled The Ineluctable Course of HistoryIn that missive, we recommended the purchase of a DB January 14 CALL for $1.05 and sale of the DB January 9 PUT for $1.00.  Total debit on the trade was $0.05 per pair.

 

And today?  The CALL goes for $1.25 and the PUT for $0.55.  Sell the former and buy back the latter and you come home with a 1300% profit – in just a week!

 

Take it.

 

And then go for the gold…

 

Tumble.

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Let her crash like Azi!

 

Many happy returns,

 

Matt McAbby

See what people are saying...

  1. Jim Joyner

    Matt
    You are probably correct on an intermediate basis but short term the breath indicators on Nasdaq and SP-500 are weak. Less than 60% of stocks on Nasdaq are above 50 DMA and less than 50% on the SP-500. Also since 1988 volatility has increased in October in every presidential election year and the VIX is pretty low (13.48). I could be wrong but I see the current market looking very similar to 4/2012-6/2012 as the weekly technicals look similar-MACD cross over on weekly chart currently and in 2012. Just my 2 cents!

    Think we will get a small correction 5-10%. After the correction believe you are correct.
    Don’t forget Yellen wants the dollar to stay low to help exports. So maybe a slow rise in the dollar. I see the ascending pattern but may take time to fully develop.
    I continue to read that many are loading up on Gold or at least over weighting their portfolios. I also believe GOLD will rally sharply once RSI gets to 20. Then it will be time re-evaluate, I guess.
    Jim

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