Could Gold Miners Be Ready To Shine?
Gold mining stocks have been mired in an ugly slide, losing over 12% from their June 18 closing high. The unwinding of risk averse trades is being credited with the decline in gold and the gold miners. Much of that thought is predicated on the sanguine view over European debt and the 'stress tests' recently completed on the European banks. Anyone with half a brain knows that those stress tests were nothing more than cheap propaganda pieces meant to deceive investors into believing that the worst has indeed passed. If things are all of a sudden so rosy, why are Euribor rates continuing to tighten? Something is up here and I think we are a long way from the end of risk aversion, in fact, we are still in the early stages. Risk aversion may return to this market much sooner than many polly-annas want to think, and the gold miners look ready for some fresh inflows.
First let's take a look at the GDX, pr Market Vectors Gold Miners Index. In my work, I try to analyze markets in much different ways than simply throwing a basic momentum indicator and/or volume on a chart and making a call. In the chart below, I have two plots below price that I am sure many of you are not used to seeing. First, we will take a long term look at GDX with these indicators to give you a better idea of how they function.
In the middle pane, I have plotted what is best described as an On Balance Volume type of indicator that is computed using the top ten weighted stocks in GDX. Each day the closing price of each of the ten stocks is analyzed. If the stock closed higher on the day, that stock's volume is added to the positive volume column. If the stock closed lower on the day, that stock's volume is added to the negative column. A percentage of positive volume to total volume for the day is then computed. Since the resulting data stream can be rather choppy and unusable in its raw form from day to day, I smoothed the data stream with a ten day moving average. The indicator is simple to interpret since the calculation provides a normalized scale of 0 - 100. Typically when this indicator reaches 70 and above, positive volume has reached a short term peak and a price pullback is due. Typically when it dips down to 30 or below, positive volume is ready to flow back into the market, providing at least a short term bounce.
In the bottom pane I have plotted a 'z-score' of the price of GDX relative to its 40 day moving average. That is, how many standard deviations did the price close above or below GDX's 40 day moving average? The standard deviation is computed over the last forty days as well, so it sees slight changes daily along with the moving average. When using standard deviation, 70% of the price action should be within the range of 1 to -1 standard deviations, while 95% or price values should fall within a range of 2 to -2 standard deviations. We are looking to exploit those rare situations where price moves outside the range of 2 to -2 standard deviations. This provides trading opportunities as price reverts back to its statistical mean.
When looking at the chart, you will notice three things. First, when the Positive Volume Indicator peaks over 70, that usually coincides with short term peaks in price (dashed lines). Second, when the Positive Volume Indicator falls below 30, a bounce follows (circled). Third, when the Standard Deviation Indicator falls below -2 a short term bounce follows (circled).
Now we will zoom in and look at the current situation of GDX in relation to these indicators.
Notice in the chart of GDX below how the Positive Volume Indicator is showing positive volume flows into the top GDX weighted stocks even as the price of GDX itself continued to fall. This creates a bullish divergence between the indicator and the price of GDX. Next, notice how the Standard Deviation Indicator closed at -2.04 on July 27 before bouncing higher on Wednesday, July 28. Both of these indicators are saying that a bounce is due in GDX.
Will this be enough to get the uptrend moving again? The conviction of new buyers needs to be measured with volume totals. If volume increases on an upward push, it is a pretty safe bet that GDX will move sharply higher from here. For those of you who are looking for higher prices based on some form of fundamental analysis, this statistical evidence backs up your claim. If the bloom really begins to fade from the European rose and the euro begins to crack again, this could simply be the beginning of a very large move.
First let's take a look at the GDX, pr Market Vectors Gold Miners Index. In my work, I try to analyze markets in much different ways than simply throwing a basic momentum indicator and/or volume on a chart and making a call. In the chart below, I have two plots below price that I am sure many of you are not used to seeing. First, we will take a long term look at GDX with these indicators to give you a better idea of how they function.
In the middle pane, I have plotted what is best described as an On Balance Volume type of indicator that is computed using the top ten weighted stocks in GDX. Each day the closing price of each of the ten stocks is analyzed. If the stock closed higher on the day, that stock's volume is added to the positive volume column. If the stock closed lower on the day, that stock's volume is added to the negative column. A percentage of positive volume to total volume for the day is then computed. Since the resulting data stream can be rather choppy and unusable in its raw form from day to day, I smoothed the data stream with a ten day moving average. The indicator is simple to interpret since the calculation provides a normalized scale of 0 - 100. Typically when this indicator reaches 70 and above, positive volume has reached a short term peak and a price pullback is due. Typically when it dips down to 30 or below, positive volume is ready to flow back into the market, providing at least a short term bounce.
In the bottom pane I have plotted a 'z-score' of the price of GDX relative to its 40 day moving average. That is, how many standard deviations did the price close above or below GDX's 40 day moving average? The standard deviation is computed over the last forty days as well, so it sees slight changes daily along with the moving average. When using standard deviation, 70% of the price action should be within the range of 1 to -1 standard deviations, while 95% or price values should fall within a range of 2 to -2 standard deviations. We are looking to exploit those rare situations where price moves outside the range of 2 to -2 standard deviations. This provides trading opportunities as price reverts back to its statistical mean.
When looking at the chart, you will notice three things. First, when the Positive Volume Indicator peaks over 70, that usually coincides with short term peaks in price (dashed lines). Second, when the Positive Volume Indicator falls below 30, a bounce follows (circled). Third, when the Standard Deviation Indicator falls below -2 a short term bounce follows (circled).
Now we will zoom in and look at the current situation of GDX in relation to these indicators.
Notice in the chart of GDX below how the Positive Volume Indicator is showing positive volume flows into the top GDX weighted stocks even as the price of GDX itself continued to fall. This creates a bullish divergence between the indicator and the price of GDX. Next, notice how the Standard Deviation Indicator closed at -2.04 on July 27 before bouncing higher on Wednesday, July 28. Both of these indicators are saying that a bounce is due in GDX.
Will this be enough to get the uptrend moving again? The conviction of new buyers needs to be measured with volume totals. If volume increases on an upward push, it is a pretty safe bet that GDX will move sharply higher from here. For those of you who are looking for higher prices based on some form of fundamental analysis, this statistical evidence backs up your claim. If the bloom really begins to fade from the European rose and the euro begins to crack again, this could simply be the beginning of a very large move.
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