It’s been a tumultuous year for gold.

Initially, runaway inflation and the Ukrainian war saw gold flourish in the early months of 2022. The VanEck Gold Miners ETF (GDX) rallied around 45% from late January through April.

But after peaking in April, it’s been one-way traffic ever since.

In less than a month, GDX traded back at its early January lows. And after breaking down through long-term support, GDX has continued to drift lower.

Conventional wisdom expects gold to rise during high inflation and economic uncertainty. But right now, gold is tumbling when many think it should be flourishing.

So today, we’ll see what’s in store for this closely watched commodity.

How Gold’s Downtrend Began

On the chart below, you can see how a common pattern led GDX to reverse from its April high at ‘A.’

VanEck Gold Miners ETF (GDX)

Source: eSignal

While GDX made higher highs, the Relative Strength Index (RSI) made lower highs. And we know that divergence between the stock price and the RSI often leads to a change in direction.

Soon after, the RSI fell sharply down through support (green line) into the lower half of its range – causing the GDX stock price to drop heavily too.

And as the stock price dropped, the 10-day moving average (MA – red line) crossed below the 50-day MA (blue line) at a steep angle, before it continued to accelerate lower.

Then, when the RSI bounced out of oversold territory (lower grey dashed line) in May, GDX tried to rally.

However, the RSI was unable to break up through resistance. Instead, it drifted lower and allowed GDX’s fall to continue…

VanEck Gold Miners ETF (GDX)

Source: eSignal

This negative momentum caused GDX to test and fall through the long-term support (orange line) that it’s held since October 2021.

Apart from a brief period in August, the RSI has remained in the lower half of its range for the duration of GDX’s downtrend (a common bear pattern).

GDX is now trading at its lowest level in two and a half years. And that’s while inflation is running at 40-year highs.

Despite the negative sentiment, there are two key technical signals I’m watching closely. And if they play out, they could set us up for a potential trade.

Gold’s Next Move

Right now, the RSI is retesting resistance. So what happens around this level is key.

If the RSI breaks up through resistance and stays in the upper half of its range, then GDX could enjoy a quick bounce.

Unlike the move in August when the RSI petered out (as did the rally at ‘B’), this time we’re looking for a decisive move higher.

If the RSI again fails to break resistance and instead drifts lower, then this four-month downtrend will likely go further.

I’m also watching our two MAs as they move closer together…

If the 10-day MA breaks back above the 50-day MA – and the RSI breaks into the upper half of its range – we could see a new rally.

And that would set us up for a potential long trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a reader shares his thoughts on the current state of inflation…

Larry,

I think the recent upward activity is nothing but a very short burst of individuals needing to get out of their homes. The travel season was strong in June and July, but finite. August has already seen a drawdown. Consumer savings amongst the 90% are depleted and most recent activity has maxed out credit cards.

I expect the 50-basis points increase in Fed rates in September will bring some temporary euphoria to Wall Street, but the difficult times of inflation and job deterioration will persist. The inflation numbers will look better than reality as prices yield little sign of rollback – especially in food and housing. The stats will begin to compare with the last one-third of 2021 when strong inflation began to appear.

Politicians, in their zeal to control the narrative, will gloss over that fact. Yes, the rate of increase might drop quickly to 5.75%. But in great measure due to a comparison to 4% last fall/winter as compared to 1-2% in the spring/summer.

– Richard T.

Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@opportunistictrader.com.