Gold stocks collapsed last week.
The Market Vectors Gold Miners Fund (GDX) – which holds the shares of most major gold producers – was down 15% on Thursday's close. On Friday, it traded as low as $13.17 per share... its lowest price ever.
But two hours before the end of trading, GDX reversed into positive territory. And it closed 3.4% higher on the day.
This move has likely triggered the start of a short-term rally in gold stocks...
Short-term rallies in gold stocks typically begin when the sector reaches extremely oversold conditions. Then one day, gold stocks gap lower, find a bottom, and reverse higher on the day – often closing with a strong push to the upside.
That's what happened with the gold sector on Friday.
GDX was already in extreme oversold territory late last week. Intense selling pressure had pushed it more than 20% below its 50-day moving average (DMA). That's an extreme move for a group that rarely trades more than 15% below the 50-DMA.
GDX opened lower on Friday, and the selling pressure intensified. But then, GDX reversed into positive territory and closed higher on the day.
This is the type of action that usually creates a short-term rally phase in the gold sector. But we're still at least a few weeks away from a significant bottom in gold stocks.
The recent collapse in gold stocks has caused a lot of technical damage to the chart patterns. It's going to take time and a lot of back-and-forth action to repair that damage. So while gold stocks have room to run higher in the short term, they're not ready to explode to the upside and kick off a new, intermediate-term rally phase just yet. That's still a few weeks away.
Take a look at how the gold sector bottomed last December...
GDX was declining for several weeks before it collapsed 15% in just a few days late last October (the first blue arrow). It made a feeble bounce attempt and then fell to a new low in early November (the first blue circle).
That marked a short-term bottom for GDX and the beginning of a quick rally phase.
GDX rallied nearly 20% over the next three weeks and tagged its 50-DMA, which served as resistance. Gold stocks then declined again. GDX dropped back down and almost retested the early November low before kicking off a more significant, intermediate-term rally back up to $23 per share.
Now look at the recent action...
GDX declined for several weeks before collapsing 15% last week. It made a feeble bounce before dropping to a new low. And Friday's action looks like GDX has kicked off a short-term rally phase. This rally should at least challenge the nine-day exponential moving average (EMA) at about $14.70, and may rise enough to meet the 50-DMA near $18 (though that's doubtful).
But GDX is not likely to push straight up and jump over the 50-DMA on the first attempt. Instead, it will likely come back down and retest last week's low before forming a more significant bottom.
In short, gold stocks are likely to rally in the short term. But we're still a few weeks away from a more significant, intermediate-term upside move.
Best regards and good trading,