Miners Attempting to Form a Bottom into Week EndFriday October 21, 2016 10:44
Since the paper gold “stop run” began on Oct. 4, the oversold mining sector is attempting to bounce from the strong support levels of 22 GDX and 190 HUI mentioned last week in this column. However, we must not rule out another attempt to break the $1250 level to set up a final plunge with a possible “sling-shot” reversal in the miners into year end.
So far, the GDX and the HUI have corrected roughly 30% from their early summer highs. However, after a blistering 179% gain in the miners from the January 19th bear trap low, we may very well see the GDX 26 and HUI 225 breakdown levels tested, then sold off in final capitulation fashion towards the GDX 20 and HUI 180 levels.
If this were to take place, I believe we could also see a “sling-shot” type move into year end as the last of the late comers sell for a tax loss and the patient investors waiting for the lowest possible low risk entries snap up the deals in quality miners.
The levels to watch in order to negate this scenario would be 26 GDX and 235 HUI. If we see weekly closes above these levels, then I believe the bottom reached this week would hold for the second leg up in this new miner bull market.
Experience, as well as history (in bull markets) tells me a 30% correction from a 179% move is just not enough before this sector can go higher. This is why I am leaning towards another “stop run” in gold below $1250 down to the $1190-$1200 level which would set up a possible 35-38% correction of the initial move off of the January low in the miners.
It is our job as miner investors here to position ourselves to benefit in either scenario. This means, continue to hold core positions with plenty of cash and a researched list of miners to add more at lower levels if you are so inclined. If you have yet to take a position in this sector, it may be best to wait for the aforementioned weekly 26 GDX and 235 HUI levels to be closed above before buying. However, if they are not, then wait for the possible “stop run” below $1250 gold to unfold and take the miners down to possible final capitulation levels of 20 GDX and 180 HUI. I believe this to be the best risk-averse plan going forward from this juncture in the sector.
Finally, later this afternoon, Fed Chairwoman Janet Yellen will speak at Federal Reserve Bank of Boston's Annual Research Conference for "The Elusive "Great" Recovery: Causes and Implications for Future Business Cycle". This could possibly be a very strong sector catalyst either way for the weekly close today.
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."