The Next Test for Gold Comes After Its Big Rally

A promising start to 2022 set gold bugs alight…

Runaway inflation, war, and other geopolitical events saw the price of gold rally strongly. From February to April 2022, the VanEck Gold Miners ETF (GDX) gained an impressive 41%.

However, after topping out mid-April, GDX soon reversed sharply and gave those gains back in less than a month.

GDX then spent the next six months stuck in a grinding downtrend. And we saw it trade at its lowest level since March 2020.

But when we checked out GDX on December 5, its downtrend had bottomed out. Since its September low, it had rallied 40%.

So today, we’ll see how GDX’s rally is progressing as we check out some potential trades…

Gold’s Strong Reversal

On the chart below, you can see GDX’s clear reversal from its April 2022 high.

That reversal was set up by a common chart pattern that often warns of a potential change in direction.

As the orange lines show, the Relative Strength Index (RSI) was heading lower while GDX was making higher highs.

Take a look…

VanEck Gold Miners ETF (GDX)

Source: eSignal

This decline in buying momentum caused GDX to top out…

Selling in GDX then accelerated as the RSI broke down through support (green line) and remained stuck in the lower half of its band.

The other tell-tale bearish signal was the action of our two moving averages (MAs).

As the chart shows, the 10-day MA (red line) broke down below the 50-day MA (blue line), confirming the downtrend in GDX. It remained there until the end of October.

However, when we checked out GDX on December 5 (red arrow), we saw two clear signs that GDX’s bearish pattern was reversing…

1. The RSI had broken through resistance and gained a firm foothold in the upper half of its range.

2. The 10-day MA had broken back above the 50-day MA and was continuing to accelerate higher.

Take another look at the chart…

VanEck Gold Miners ETF (GDX)

Source: eSignal

Since then, you can see that the RSI pulled back, regularly tested, and held support through the latter half of December (red circle).

It then rallied off that support level in January, sending GDX to its highest level since June 2022.

So with GDX now up 47% from its September low, what am I expecting from here?

Watch Out for Any Pullback

For GDX’s rally to continue, the RSI will need to keep tracking in the upper half of its range. The longer it stays in this upper band, then the longer any rally should be.

However, with GDX’s recent strong up move, we’ll need to see if it goes into overbought territory (upper grey dashed line).

Any sharp reversal from overbought territory could see a quick pullback in GDX’s price. I’ll also be watching our two MAs.

Right now, the 10-day MA is bullishly continuing to accelerate above the 50-day MA (which is also trending higher).

If this trend reverses (with the 10-day MA crossing below the 50-day MA), then that would mean GDX’s current up move is over for now.

Reader Mailbag

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