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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
A few weeks ago, we checked in on the VanEck Gold Miners ETF (GDX).
We saw that while the broader market had fallen heavily throughout the start of 2022, GDX had instead rallied strongly.
From early February to its April high, GDX rallied 44%.
However, after hitting that 17-month high, GDX’s stock price quickly reversed…
When I wrote about GDX on April 26 (red arrow on the chart), it had just fallen 10% in the previous week and was looking vulnerable to further falls.
Since then GDX has continued to fall. Right now, it’s trading back at a key level.
After such a strong rally and a dramatic fall, today I’m going to discuss what’s next for GDX.
So, let’s pull up the chart…
VanEck Gold Miners ETF (GDX)
Source: eSignal
The dark blue horizontal line represents support for GDX. It held through December to February and was the base from which GDX rallied.
The stength of that February rally is shown by our two moving averages (MAs).
The 10-day MA (red line) broke above and moved away from the 50-day MA (blue line).
However, divergence (orange lines) between the stock price and the Relative Strength Index (RSI) led to a change in direction.
The RSI then dropped heavily – showing rapidly declining momentum – and the GDX stock price fell sharply…
GDX then tried to find support as it briefly traded sideways through April.
However, with the RSI stuck in the lower half of its range, there weren’t enough buyers to maintain that price level.
The 10-day MA crossing down over the 50-day MA then confirmed GDX’s downtrend.
Right now, GDX is trading right back at the same level (dark blue line) from where the original rally began.
So, what can we expect from here?
After such a strong fall, the RSI is showing us that GDX is in oversold territory – below the lower dashed grey line in the bottom half of the chart.
If the RSI rallies back toward resistance and GDX holds support, then that means GDX could be in for a brief bounce.
And this could provide an opportunity for a potential long trade.
However, what happens around that resistance level is key.
So, let’s take another look at the chart…
VanEck Gold Miners ETF (GDX)
Source: eSignal
If the RSI breaks back above through resistance and into the upper half of its range, then GDX has the potential for a bigger rally.
We would then look for the 10-day MA to break back above the 50-day MA for confirmation of an emerging uptrend.
However, if the RSI fails to break through resistance, then any bounce could be short-lived.
Without sufficient buying momentum a stock can’t maintain an uptrend.
And if the RSI remains in the lower half of its range, then it’ll be difficult for GDX to hold its current support.
That’s why the action around support and the RSI this week will be crucial…
A breakout in either direction could be the start of a much bigger move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Where do you see GDX headed next? Will gold continue to fall?
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