Is This the End of Gold’s Bear Market? The Charts Say…
Sat Mar 05 2016
Live Index (1359 articles)
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Is This the End of Gold’s Bear Market? The Charts Say…

Although inflation is low and the U.S. dollar is high, gold seems to be waking up. It’s hard not to notice that the yellow metal has already made quite a few changes for the better on the charts. And it appears gold mining stocks are coming along for the ride.

First, let’s take a look at the long-term chart of gold futures. Using a log scale chart, we see they decisively moved above the major trendline drawn from the 2012 high, as well as the top of the trend channel drawn from the 2014 high.

When we see breakouts through two different measures of trend, we should pay attention. Not only that, but gold futures are now above major moving averages, including the 50-day and 200-day.

On the chart above, I used the 40-week moving average as a substitute for the 200-day. This month, prices moved to their highest spread above the moving average since 2012, which was arguably before the bear market really began.

Gold mining stocks have also broken through long-term trendlines, and I think the smaller companies offer the most bang for your buck. To cut down on single stock risk, though, theMarket Vectors Junior Gold Miners ETF (NYSE: GDXJ) looks like a good choice.

As we can see in the chart, it is also above its long-term trendline from 2012 and recently broke out from an eight-month trading range. For the past two weeks, GDXJ slowed its advance and volume became relatively light — both classic signs of a pause within a rising trend.

Technicals from momentum to cumulative volume are rising to confirm the ETF’s advance. So while pundits cling to the belief that gold cannot rally in the face of persistently low inflation and a fairly meek economy, the charts say otherwise.

To be sure, we’ve been fooled before. Just over a year ago, GDXJ sported a few positive technical signs, but I made the mistake of anticipating a breakout that never came.

Now, both the metal and ETF have broken out. The makes a good case for the end of the bear market. Of course, while it does not guarantee a bull market, it is evidence that we should at least consider bullish strategies again.

After such a devastating bear market, the likely scenario is for GDXJ to move sideways in a range. But even so, its swings should be large enough for traders to exploit. Considering the ETF fell from a high around $ 179 in 2010 to a low under $ 17 last month, even a small retracement could result in a large percentage gain.

The height of the recent trading range projected up from the breakout point yields a first objective of about $ 28.50, although resistance does not appear until about $ 30. But I have found that price targets based on pattern breakouts form at integral multiples of the pattern’s height. So I think that once this rally gets going it will force a lot of doubters to jump in and easily take GDXJ to its second objective of $ 34.

That would only be a little more than a 10% retracement of the bear market. When viewed in that context, it is not much, but since prices are so low, the percentage gain could be quite attractive.

Recommended Trade Setup:

— Buy GDXJ at the market price
— Set stop-loss at $ 23
— Set initial price target at $ 34 for a potential 38% gain in eight weeks

Note: For traders looking for even bigger percentage gains, there is a simple strategy that could allow you to make a 159% profit on that 38% move by risking just $ 540. To find out how, follow this link.


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Tags ETF, Gold
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