Gold Miners ETF (GDX)
The price of gold is up to over $1,300 from it’s price of $1,050 an ounce at the start of the year. And silver has surged 30% from 6-year lows since January.
The demand for both precious metals has increased, with demand in China and India for gold increasing exponentially this year, and silver demand for new installations of solar panels is expected to set a new record in 2016.
Considering that at the beginning of the year these precious metals were showing no signs of snapping out of their multi-year bear market, and that with gold sticking close to $1,050 an ounce with many companies mining at a loss, this year’s gains in the industry are remarkable.
In fact, gold and silver miners in particular have been the best performing sector in 2016. The GDX alone—which holds a basket of 50 miners—is up 140% since mid-January.
If you missed the opportunity to get in on this trend early, or if you did get in early but want to add to your position when the time is right, read on to get specific prices for a second entry into this trend that’s sure to continue.
Miners have seen fundamentals improve significantly. With gold trading at $1,050 an ounce in January, your average producer’s margin slumped to $220 per ounce. Thankfully profit margins only fell by 12% despite the 25% decrease in gold prices since 2013. The industry responded to the slump by cutting costs and restructuring operations—and were assisted by lower fuel prices and helped by the strong dollar—minimizing the impact on margins.
This cost cutting put miners in a great position this year. With gold now trading above $1,300 an ounce, net profit margins have increased from $220 per ounce to over $500. That’s a 127% increase in 8 months.
Our proprietary trend following software, Market Trend Signal, issued BUY signals on all major gold and silver miners between December 2015 and February 2016, at or near their bottoms, enabling investors to get in on the trend early.
The chart below shows how quickly users were able to get in on the trend. The example shows a sustainable BUY signal on GDX on February 1 at $14.33, just nine days after the bottom.
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But are these recent gains in the sector—which seem astronomical in such a short time frame—sustainable?
Miners may have gotten a bit ahead of themselves and have already priced-in much higher metal prices than the current price. Therefore, they are due for a pull-back.
However, I do believe that this year’s gains in the industry reflect improvement in profit margins, which isn’t a perfect correlation with stock appreciation, but there is a link and I believe that current valuations will hold, even though it now appears we are in the middle of a technical price correction.
This is where technical analysis comes in handy. In forecasting where the pull-back, which I believe has already started, might end, we can offer investors who missed the first opportunity a second chance to get in on the action.
To identify support on this pullback, we’re going to look at Fibonacci numbers and ratios, and how to use them, to find our support.
While many of our readers may be familiar with the Fibonacci concept, I’ll provide a quick overview of the concept before jumping into our analysis.
StockCharts gives a great introduction to Fibonacci Retracements for reference:
“Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci Retracements can also be applied after a decline to forecast the length of a counter trend bounce. These retracements can be combined with other indicators and price patterns to create an overall strategy.”
To calculate Fibonacci retracement levels the old fashion way, by hand, in order to determine where a pull-back in an uptrend might find support, you take the swing low (lowest intra-day low) that started the uptrend and the swing high (highest intra-day high) you suspect is the temporary top and calculate the difference. You then multiply this difference by the Fibonacci ratios, and then subtract it from the swing high to determine potential support levels.
To determine potential resistance levels on a bounce during a downtrend, you do the opposite. Take the swing high that started the downtrend and the swing low you suspect is the temporary bottom and calculate the difference. You then multiply this difference by the Fibonacci ratios and then add it to the swing low to determine the potential resistance levels.
Of course the easiest way to find Fibonacci support/resistance levels is to use a charting software that already comes equipped with a Fibonacci retracement tool, which most do.
The chart below shows the Fibonacci support levels on GDX using the Market Trend Signal Fibonacci retracement tool.
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he 38.2% retracement level on GDX is $24.38, the 50% level is $22.09, and the 61.8% level is $19.81.
How might this be useful for you? Typically, after a strong uptrend like we have seen in gold and silver miners, the minimum pull-back—once a more significant correction begins—would at least drop to the 38.2% level. So investors and traders who missed buying near the bottom would look for the first potential entry on a second chance around $24.38 on GDX.
However, even though the 38.2% level will often provide support and coincide with a bottom allowing the uptrend to resume, more often than not, the 38.2% level will only provide temporary support in the first “leg” of the correction, which will then be followed by sideways action or even a bounce, but that bounce should not exceed the swing high top of the uptrend.
Once the bounce is complete, the correction will resume creating the second “leg” which will complete and find strong support at the 50% or the 61.8% Fibonacci retracement levels ($22.09 and $19.81 on GDX). From this low, the prior uptrend will resume and ultimately take out the previous high that started the correction.
So those looking for a second chance entry might start to scale into a position at the 38.2% Fibonacci level of $24.38 and add to their position if and when the price hits the 50% and 61.8% levels ($22.09 and $19.81).
As discussed earlier in this article, our proprietary software Market Trend Signal, alerted users to the trend in gold and silver stocks at or near their bottoms, giving a sustainable buy signal on GDX at $14.33 allowing investors the opportunity to ride the rise.
Source : markettrendsignal