Gold Bugs Will Have Their Day in the Sun

By TradeSmith Research Team

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Gold stocks are ripping… finally.

Despite reaching an all-time high twice in the last three years, gold struggled to find its footing with a sustained rally.

Both times, the dusty coffins of gold bugs everywhere were cracked open… their withered faces graced by a gleaming light… Only to be nailed back shut and kicked six feet under.

It stung.

I’ll even open the kimono for a moment: my biggest portfolio sore spot is an overlarge position in the ETFMG Prime Junior Silver Miners ETF (SILJ), bought during silver’s post-pandemic surge. My cost basis is just under $12, and that’s after much dollar-cost averaging.

Why hold on? Because the fundamentals for precious metals are just as strong today as they were back then. High inflation and government deficits, just to name two big factors, ought to turn more heads toward the shiny metals in time. (Not to mention, the Volatility Quotient stop price according to TradeStops is $6.37 — no surprise given the sector’s volatility.)

Right now, gold and other precious metals stocks have a trifecta of bullish technical evidence backing up the latest rally. The result is the healthiest price action we’ve seen in quite some time.

Even if you’ve never touched gold stocks and never thought to, read today’s column very closely. It’ll provide, at the very least, a trade opportunity you should consider.

One Heck of a Chart

We have one heck of a chart to talk about…

Pardon the complexity for a moment and take a look at this chart of the VanEck Gold Miners ETF (GDX):

There’s a lot of good things to talk about on this chart.

The positive Relative Strength Index (RSI) divergence at the bottom is one. The RSI has made a series of higher highs while the price of GDX chopped around since summer. That indicates momentum is building. On top of that, the RSI has been on a buy signal since mid-November.

Another great thing is the downtrend break. In October, gold broke the white downtrend line it’s been stuck in since May (shown on the top portion of the chart). And importantly, it came back to retest the former downtrend line as support twice in October and November. Both times, support held.

But the best thing of all is the inverse head-and-shoulders pattern. Let me explain…

An inverse head-and-shoulders pattern is when an asset makes one low (a shoulder), a lower low (a head), and then a third low that’s higher than the second and matches the first (the other shoulder). It’s a bullish pattern that tends to resolve to the upside.

That’s exactly what we see in the chart above. Look at the curved green lines. GDX made one low in mid-August, another at the start of October, and a third in mid-November.

When inverse head-and-shoulders patterns resolve, they tend to do so with as much strength as the distance between the top of the head and the “neckline” that makes up the top of the pattern’s price action.

If that happens, we could see GDX trade at around $34.50 — spitting distance from a new all-time high.

In terms of downside risk, GDX now has strong support at its 200-day moving average (the blue line in the chart above) around $30 per share. I would be comfortable holding GDX a bit below that, but not much more. The 50-day moving average line is turning up, too, to provide additional support below that level.

Don’t just take my word for it. TradeSmith’s algorithmic tools like the look of gold stocks, too. Take a look at what the Trade Cycles indicator is showing on the chart of GDX:

GDX’s composite cycle (the purple line) forecasts gold stocks should trend higher though March. GDX is also just about to enter a Peak cycle (the orange shaded area on the chart), where we tend to see substantial price gains before a pullback.

All this evidence is setting up a juicy trade opportunity.

Gold stocks are taking a breather as I write on Thursday, with GDX down about half a percent from the open. That’s a good opportunity to buy the ETF at better prices, before the pattern resolves.

You could either buy shares of GDX or trade an at-the-money call option set to expire at the end of January to leverage the upside move.

Gold stocks may have hit at least a short-term bottom here, and there’s a lot of evidence to support a new all-time-high gold price in short order. Now’s the time to prepare for that move.

To your health and wealth,

Michael Salvatore
Michael Salvatore
Editor, TradeSmith Daily