Breakout or breakdown

GDX is fast approaching a point where it will either break up or break down hard. This is because gold is at the cusp of completing an important pattern. Here is the chart for GLD:

GLD (and gold) has nearly completed a symmetrical triangle. According to Elliott Wave Theory, the triangle should consist of five waves. The blue lines show that it has completed five waves. This should mean a break downward at any moment. This does not mean it will break down, but a break is likely soon, either up or down, and a fast move should follow. Since this is a triangle, and a triangle is often the last consolidation in an up or down move, it should turn up fairly quickly after a breakdown scares everyone. This fits in perfectly with last week's post showing a possible 5th wave due in GDX.
Here is GDX:

As of Friday, GDX closed just below resistance as shown by the blue line. If GDX breaks above this line it is a buy, but you can see by the blue arrows that this type of buy has failed twice in the last five months. A failure is likely again if the gold triangle breaks down. If gold breaks up this line would be a good buy, so buying with a stop below the blue line is a good idea.

A line in the sand

First a disclaimer. I am neither bullish nor bearish on the gold market in the short term. I'd be very happy if a new bull move has started, but I want to be safe if it has not. This post is to present the evidence for both views.

There is a lot of commentary lately about how the correction in the gold market is over and a new bullish move is about to begin. A three month chart of gdx seems to support this view.

There is what looks like a clearly bullish flag on the chart above (shown in black), but there are two caveats. 
First, the flag should have broken out a couple days ago, but instead it fell and violated the support of its first leg down. It can still break up and out and that is what I would prefer.
Second, a bullish flag should be preceded by five clear waves up and there is no way I can find five waves up in this chart. (up waves as I see them in blue)
This next chart is a twelve month chart of gdx which gives a larger perspective.

Starting at the top of the chart, I have drawn five black down waves, followed by three red up waves, followed by five more black down waves that end at the low of 49.22. The 49.22 occurred at the end of December 2011, and in January, the same general pattern as we have now had formed. There were a lot of people calling the bottom at that time as well and the evidence was good. We had a perfect five - three - five pattern creating a large bullish flag. This soon broke down and we had a major wave down to a new low of 39.08. As you can see by the blue lines, GDX has now formed a very large four wave down pattern. The last blue line, which ends with an arrow, shows that the fifth wave has not been completed.
The title of this post is "A line in the sand" and the GDX price of 49.22 is that line. In a five wave pattern, the fourth wave should never overlap the first wave. The first wave down ended at 49.22. So far, the fourth wave has stopped at 48.72. If the bullish flag on the three month chart can break up and over 49.22 with strength, the correction is likely over. If it does it weakly and falls back or fails to exceed 49.22 at all another down wave is possible. To qualify as a fifth wave it merely has to go down to 39.07 and turn, but much lower is possible. A good Fibonacci target is 36.90, but anything is possible.
I think a fifth wave would scare enough people to produce a dramatic high volume reversal and put an end to the correction.
The next chart of the QQQ etf shows another problem:

This chart and the chart for SPY, which generally matches this one, shows that the general market has gone down in five waves (in black) and up in three. (in red) It could still be working on the third leg up, but five waves down, and three waves up imply another five waves down to new lows. If the general market goes down hard again it could pull the gold stocks down with it. This is not always true, but it does happen quite often.
My conclusion is: Don't blindly listen to the consensus, be ready for anything.

GDX on the move

GDX broke out of its recent range to the downside on Friday 4/20/12, so it appears ready to move again. Even with the downside break, the direction this move will take is not clear yet. The same chart is shown twice below with different possible outcomes. The key here is to be ready for either one.

The chart above clearly shows the descending triangle which formed over the past seven days and decisively broke to the downside on Friday. Descending triangles are nearly always bearish and this one proved no exception. Descending triangles also have measuring implications to tell you where to expect the next bottom. This is done by subtracting the base of the triangle ($46.39) from its highest point ($48.33) and then subtracting the result from the base to get the target for the move. Here is the math:
48.33 - 46.39 = 1.94
46.39 - 1.94 = 44.45
$44.45 is the target, but this is not set in stone.
In fact, there is an alternate possibility shown below.

As long as GDX remains above the old low of 45.98 there is the possibility that the last seven days have formed a bullish flag and a new uptrend could begin from here.
I favor a downward move to new lows first, mainly because it give more precise entry points for buyers. Such a move could also provide a needed wash out of sellers to produce a good rally.
In any case, this correction has been going on for a long time now and it is likely that a new uptrend could be substantial and long when it starts.
Happy trading.

When a Flag is Not a Flag: Anatomy of a trading decision

On 4/17/12 GDX produced what appeared to be a flag hanging on a flag pole and I did not buy. Here is an account of the thought process that went into rejecting the flag as false.
Here is the chart which by mid afternoon had me getting ready for a buy:

This is the full day chart and it sure looks like a flag, but there are multiple reasons to reject it.

Reason #1:
The federal reserve meets next Wednesday. If I buy, I'm saying that I believe the low is in. Over the past three years, there have been several times that a major low has occurred near or on the day of a federal reserve meeting. Almost all of those lows occurred during a period starting five days before the meeting until one day after the meeting. There is one outlier that occurred nine days before the meeting. The most recent low in GDX was on 4/10/12, eleven days before the meeting. The most recent low in HUI was on 4/4/12, fourteen days before the meeting. Statistically, there should be another low coming. This would not stop me from buying if it were the only negative, but it added to the list of other negatives.

Same chart new lines:

Reason #2:
A broken flag. This flag is drawn with a line between the two highs that straddle the first low, and a parallel line from that first low. This clearly shows that prices broke below the bottom line, went back up to test it, fell again, and remained lower. This is a warning sign, but not a clear indication of danger. If GDX had done exactly as above, but was resting on a clear support, I would have bought, especially with the rally in the last couple of minutes.

A chart full of problems:

Reason #3:
We are still just below a very major resistance at 48.05, marked by the black line above. This is not only the resistance built up a couple weeks ago, but it is also very close to the same resistance line of the broken 18 month long megaphone pattern shown in earlier posts. However, this alone would not keep me out if the flag was good.

Reason #4:
The flag fell through support at the same time that the flag broke down. This support is marked by the red line with two arrows showing he points where the support was building. (Marked as support and resistance)
This is enough to abort the buy. A good flag should rest on support.

Reason #5:
There is a broken down bearish flag on the chart. (Marked in blue) Normally, this flag would be invalid because the top line starts before the low, but HUI has a different low which is before the line and HUI has to confirm the trades. On the morning of our flag, GDX (and HUI) broke back into the bottom of the bearish flag. (Marked as break out) This is bullish, and alerted me to the possibility of a flag buy. A couple of hours later, GDX broke down again, which is bearish. This was also enough, on its own, to stop the buy.

I watched right up until the end of the day, because if GDX would have flown higher in the last half hour to close above the blue channel line, I would have bought. This would have closed it above the red support and it would have "fixed" the flag breakdown.

Support and Resistance again

The situation with GDX is little changed for the past week. Support and resistance are still the same and GDX is still wallowing below the red resistance lines.

The black support line is a line I identified over a week ago as minor resistance. Since that time, it has been hit twice from below and it is now near a test from above after breaking above two days ago. The black line is now major support and should be watched closely.
Happy trading.

Support and Resistance Revisited

GDX had a nice rally on Thursday which could be the start of something big, but first it has some major resistance to work its way through.

These are the same support and resistance lines shown in a post a few days ago. The green support held nicely and GDX has risen up to test the red resistance area. It spent half the day on Thursday chipping away at the supply of sellers in that area without backing down. Buyers were coming in to equal the demand of the sellers. A clear close above both red lines would be bullish and a new close below them would be bearish. Either way, there is still a lot of supply above and demand below to hold it from going too far without some new push.
Happy trading.

GDX and GDXJ

GDX traded higher yesterday and appeared ready to make a flag, but there were three problems.
The first was that it made a pennant not a flag. This leaves open the possibility of a drop from here or a quick rise and then a drop.
The second problem was with HUI. As mentioned in the previous post, HUI never went lower on Thursday like GDX did. This makes the two day pattern on HUI into a bearish flag with the same implications as problem one.
The third problem is with GDXJ. GDXJ is an ETF like GDX, but the stocks that are in it are junior or more speculative gold miners. The stocks that make up GDX are older, established mines. This makes GDXJ even more volatile than GDX. GDXJ made a new low for this move yesterday, closing below the lows from last Wednesday and Thursday.
Here are the charts:

The major support and resistance lines are the same in the chart above as they were in Friday's post.
The last bar appears to have formed a flag, but this was after hours trading and occurred nowhere else.
Note how the blue resistance line repelled it yesterday morning.

The chart for GDXJ is similar, but weaker. See how there was no messing around yesterday as it dropped to new lows for the move. I will still use GDX and HUI for all analysis, but I wanted to show how different charts of essentially the same market can differ and introduce uncertainty.
GDXJ is well traded with strong volume so it is definitely a worthy trading ETF.
Happy Trading.