What a move in the goldstocks! The sector has refused to correct for more than a few days at atime. All weakness has been bought as a wall of worry has been builtand the sector emerges from a historic low that could be on par withthe 1942 low in the stock market. I thought the Federal Reservestatement or reaction to it (along with the market’soverbought condition) might cause the sector to correct this week.Instead, GDX and GDXJ powered higher and have gained roughly 13% forthe week.
The weekly candle chart(below) shows both GDXJ and GDX are in breakout mode. GDXJ moved beyondprevious resistance at $32-$33 and has upside targets at $43-$45 andeven $50. Meanwhile, GDX has surpassed resistance at $22-$23 and nowhas upside to $27-$28 and $30. Furthermore, the 38% retracement of theentire bear in GDX is at $32. Do note that the miners have gappedhigher in each of the past two days. For the sake of the bulls on thesideline, I hope to see an immediate pullback in the days ahead.
The gold stocks are alreadyvery overbought and if they continue higher unabated then we will haveto worry about a potential sizable correction. The chart below showsGDX’s parent index (GDM) along with two oscillators whichplot its distance from its 100-day and 200-day exponential movingaverages. The oscillators show the gold stocks are the second mostoverbought they have been in the past 22 years. The most overboughtpoint was early 2002 when GDM corrected 37% before climbing muchhigher.
Before we worry about asizeable correction, let me point out some very important data. The2002 correction began when GDM and HUI rebounded 212% and 311%respectively from the major low in 2000. Thus far, the two have rallied100% and 128% respectively.
Furthermore, the gold stocksare only three months removed from what could be the greatest buyingopportunity of all time in the sector! While this is a sensationalstatement, it is rooted in data and facts and not your typical gold bugdoomer porn. In short, there are three major similarities between therecent bottom in the gold stocks and the 1942 low in the stock marketwhich arguably proved to be the greatest buying opportunity ever. Idiscuss and analyze the similarities in this video.
To conclude, the gold stockshave emerged from a historic bottom, have more upside but willeventually correct. How much they correct and when depends on how fastthey reach their upside targets and what specific levels they reach. Mycurrent guess is anywhere from 25% to 35%. Considerlearning more about our premium service including our favorite juniorminers which we expect to outperform in 2016.