While most stocks were selling off heavily at the start of 2022, the gold sector was going through the roof.
From late January to its April high, the VanEck Gold Miners ETF (GDX) rallied an impressive 44%.
But after peaking on April 18, GDX gave up all its gains in less than a month.
When we last checked GDX on May 18 (red arrow on the chart), it was trading back at a major support level. Also, a key indicator showed GDX was oversold.
Back then, I wrote that if GDX held support and the Relative Strength Index (RSI) retraced higher, we could expect GDX to bounce.
And that’s exactly what happened.
Now that the RSI is tracking back around resistance, today I’m going to talk about what’s coming next.
Let’s pull up GDX’s chart…
VanEck Gold Miners ETF (GDX)
Source: eSignal
On the chart, there’s a tell-tale sign that GDX was due for a correction around mid-April.
At the same time GDX made a higher high, the RSI made a lower high.
We know divergence between these two often leads to a change in direction. But at the time, we didn’t know just how big GDX’s fall would be.
The RSI broke straight down from around overbought territory (upper grey dashed line) through support (green line), and into the lower half of its band.
This caused the buying momentum to evaporate and made GDX fall heavily.
Our two moving averages (MA) further show the steepness of that fall…
The 10-day MA (red line) broke down below the 50-day MA (blue line) at almost a right angle.
GDX’s bounce off support began in mid-May, only after the RSI fell into oversold territory (below the lower dashed grey line) and formed a ‘V.’
So far, it’s been a timid rally. This recent move’s angle is far less steep than the rally that began in February.
Let’s take another look…
VanEck Gold Miners ETF (GDX)
Source: eSignal
With the RSI now pushing up against resistance, what can we expect from here?
Well, if you look back at the February rally there were a couple of patterns…
After GDX tested and held support in February, the RSI broke up through its resistance and marked the start of that rally.
That rally then continued while the RSI remained in the upper half of its band (red circle).
We also saw how the 10-day MA crossed above the 50-day MA, accelerating strongly above it.
For GDX’s current bounce to emerge into a long-term uptrend, we need both patterns to repeat.
But since both MAs are still far from any potential crossover, the RSI’s action will be critical over the coming week.
If the RSI fails to break resistance and instead rebounds lower, this recent bounce will quickly lose momentum.
And that would mean GDX could soon retest long-term support.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Do you think GDX’s bounce will gain enough strength for a long-term uptrend?