Like Gold Miners? View Friday’s Gold Rally With Caution

The week ended on an encouraging note for bullion investors, but can we trust this rally? Only with caution.

Our hunch is that it was a false start and that precious-metal futures and mining stocks will re-test their recent lows.This puts in doubt a profitable long position we’d recommended in GDXJ, the Junior Gold Miner ETF. Our suggested entry point at 23.93 was hit on Thursday, three cents from the low. The number is a “Hidden Pivot support” that we’d disseminated when GDXJ was trading above $26.

We’d like to think the trade will work out beautifully, meaning an eventual doubler to $50 a share. Even so, we’ve already taken a precautionary step by closing out half of the initial position on the very small paper gain that existed prior to Friday’s rally.

Although we’ve characterized our short-term bearish outlook as a “hunch,” it is buttressed by technical reasoning. What concerns us most is the heavy look of bullion-sector charts even after Friday’s rally.

Indeed, there is such clarity in the larger, downtrending patterns on these charts that their respective downside targets look almost magnetic.You can see this in the GDXJ chart above – to sense the earnestness of the selling. The ABC price points established a bearish Hidden Pivot target at 22.74 that lies $1.16 beneath the low where we advised to get on board. Notice as well that the upper red line – what we call a “midpoint support” – appears to have mutated into resistance.

Now, if this were a stock that we love to hate - Goldman Sachs (GS) springs to mind - we’d probably tell readers to reverse their long positions and go short near the 25.04 midpoint. But because this is a gold-mining stock, we’re inclined to give it the benefit of the doubt. Even then, however, we have our rules. In this case, we’ll need to see the creation of a bullish “impulse leg” on the hourly chart before we sound the all-clear. That would take an unpaused thrust above both of the labeled peaks, #1 and #2.

Meanwhile, much as we’d like to hang onto our existing long position and ride it into the blue, we wouldn’t be too terribly disappointed to have another buying opportunity down at 22.74.