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Book End Miner Bear Traps in 2016?

When I was a kid, I would go to an amusement park in Southern California that had some of the best roller coasters in the world. Maybe this is one of the reasons why I now find myself addicted to the wild and crazy investment world of the tiny junior mining sector.

This year has to be one of the craziest sector roller coasters in market history and the volatility began early. On Jan. 19, we saw the GDX begin to sell off after consolidating for six months, despite gold trading $30 higher. I remember thinking, “Here we go with the final puke” after what had been a brutal four-year bear. This of course turned out to be a huge bear trap as it sprung a sharp rally that evolved into a 179% advance in only seven months.

In early August, the miners began to correct after reaching a three-year high.
Re-tracing three years of bear-market pain in just seven months was indeed, a higher high of major significance. Thus began a 43% correction which saw weekly major support broken at the $20 level that enticed me to go into risk management mode and sit with a 50% cash position in my miner account as we watched GDX lose $19.

Last week, I was concerned about a waterfall sell-off ending to this correction and was content to sit with my cash position while waiting to see how the miners would react to a possible “final gold puke” below $1100 before adding new positions.

However, the action early this week has made me re-think this possible outcome. I watched a few of the miners on my watch list make bullish reversals with gold trading flat so I began to take new positions.

On Thursday, we had a huge move in the sector as the GDX and the HUI closed at their respective 50-day moving averages on very high volume. Since most traders are actually on vacation, (this is one of the lightest trading weeks of the year), the magnitude and volume of the move are more significant than normal.

If we get significant follow though on the last trading day of the year with big volume, I have to consider the possibility of another mining sector bear trap off of a major low. This major low could be setting up the second leg of a new miner bull market.

While I still believe gold could possibly make new lows after this oversold bounce, I think the miners have a real chance of having made a major bottom here. All of the sector leaders NEM, ABX, SLW, FNV had huge moves with good volume on Thursday. Additional follow through with high volume would help to convince me this was not just an end of year book squaring move.

For confirmation of this correction being over, I will need to see a weekly close above 26 in the major miners ETF, the GDX. A good follow through move as we close out 2016 could very well set this up to happen in early January.

By David Erfle Contributor to Kitco News
newsfeedback@kitco.com

David Erfle is a 52 year old self-taught mining sector investor. He stumbled upon the mining sector in 2003 as he was looking to invest into a growing sector of the market. After researching the gains made from the 2001 bottom in the tiny gold and silver sector he became fascinated with this niche market. So much so that in 2005 he decided to sell his home and invest the entire proceeds from the sale into junior mining companies. When his account had tripled by September, 2007, he decided to quit his job as the Telecommunications Equipment Buyer at UCLA and make investing in this sector his full time job. He personally survived two bear markets, witnessed incredible sector changes and had to alter his investment philosophy numerous times in order to adapt to changing market conditions."

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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