It’s been a rather uneventful week in the metals complex, with the miners still trying to find their footing after the sharp correction that began in September. While the Gold Juniors Index (NYSE:GDXJ) has made up some ground after testing the $36.00 level twice last month, it still has not shown enough follow-through to suggest the correction is over. The key to exiting this correction would be a weekly close above $40.40, something the index has yet to accomplish on its rallies. I am confident that the worst is over for the correction from a price standpoint, but a lower low can’t be ruled out until overhead resistance is reclaimed.
The prevailing sentiment in the gold sector seems to be relief recently, with the majority convinced that the miners have bottomed, and we’re on the way to new highs by Christmas. When we see this type of sentiment and discussion about how investors wish they could buy more, an index will rarely bottom out. Instead, indexes usually bottom out when investors instead say, “I wish I hadn’t bought more.” The rallies the past few weeks in the Gold Juniors Index were not surprising given the oversold conditions, but they have not done enough to reverse the short-term downtrend. Let’s take a look at sentiment and technical below to get a better look at what we’re dealing with:
Looking at a chart of sentiment for gold (GLD (NYSE:GLD)) below, we can see that the metal is significantly lower than where it sat in September at consistent readings above 90% bulls. The current reading for sentiment is 45% bulls, which means there’s roughly an even divide between bulls and bears currently. A drop into the pessimism zone below 22% bulls would suggest the correction might finally have run its course, but we’re not quite there yet. It’s important to note that we don’t need a capitulation into the pessimism zone for gold to bottom, but it would be ideal.
So how does this relate to the Gold Juniors Index? Let’s take a look at the chart below:
Taking a look at the bigger picture, we can see that the Gold Juniors Index is carving out a massive saucer-shaped base on its monthly chart. This is a positive sign as long as the handle portion to this saucer is relatively shallow. Based on the current correction, a shallow handle certainly looks possible. The ideal situation would be a 3-4 month handle to shake out some weak hands, and this typically resolves with a resumption to the upside. Currently, we are on month number two of the correction, so we may need to scare off a few more weak hands before this correction is over.
Zooming in to the daily chart, we’ve got very strong resistance at $42.40, with short-term resistance at $40.40. The next support level doesn’t come in until $33.45, but this is a firm support level. This is because the 200-day moving average (yellow line) is also converging with this area, so we have double support here. While I don’t think it’s likely that we come all the way down to $33.45 before this correction ends, this remains a possibility unless $40.40 is regained on a weekly close. For this reason, the bull’s mission is getting through $40.40 on a weekly closing basis.
Based on the current setup, I don’t see any reason to rush to do anything. Investors can look to do some buying at $36.50 or lower, and be ready to sell if the index fails at $40.40. I have added a few names myself like Marathon Gold (MGDPF), and Franco Nevada Gold (FNV), but otherwise, I have not been an aggressive buyer yet. A break of the lows at $36.00 would likely set up the capitulation we need for a durable bottom.
The VanEck Vectors Junior Gold Miners ETF (NYSE:GDX) (GDXJ) was trading at $37.79 per share on Thursday morning, down $0.29 (-0.76%). Year-to-date, GDXJ has gained 10.72%, versus a 10.56% rise in the benchmark S&P 500 index during the same period.
GDXJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #10 of 33 ETFs in the Precious Metals ETFs category.