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.

GDX support and resistance

Where does GDX go from here? There is a lot of open space below with only very old support (older than 22 months).The more recent the support, the better it usually is, but some of the old support comes from years of testing highs or lows and can also be powerful. Since GDX is very over sold, and I want to be an optimist today, I will focus on recent price action and what it can mean for a possible rise. Here is an eighteen day chart:

The upper blue and lower red resistance lines are the top and bottom of the range that GDX was in for three weeks. With all of the buying at the red lines and all the selling at the upper blue line these lines should be quite strong for a while.
The lower blue line is the long term support / resistance line that trading was focused around for those three weeks.
The two red lines were support for those three weeks and now are powerful resistance and here is why. A lot of people bought in that area over those three weeks and are now down by quite a bit after the drop. Many of these people are looking for an exit so, if prices approach their break even point, they will sell, creating downward pressure on prices. At the same time, people who missed the drop will see a rise back up to the red lines as an opportunity to sell short, also pushing prices down.
Incidentally, the avoidance of these psychological pressures to buy or sell is a prime reason for buying at support areas and using tight stops. Without the worry of being down, you can make far more intelligent decisions in your trading.
Yesterday, GDX and HUI both had double bottoms with GDX going slightly lower than the previous day and HUI staying a little above. The new green support line is at the double bottom. The peak between the bottoms is the minor resistance line.
The key to a good buy on GDX would be a flag above support. I'm not too excited about the double bottom because of the measuring implications of this bottom. If the peak between the bottoms is taken out, GDX should go up the same distance above the peak as the bottom is below the peak. Roughly, 47-46 = 1 and 1+47 = 48, so the target is the red resistance line at 48. I don't generally look for quick day trades, but would rather get the bigger trends. I see two ways to get a new trend going. One is a flag above the double bottom, but below the black minor resistance. This could give the power needed to overcome the red resistance lines in one push. The other, more powerful change to watch for would be a strong push back over the red lines followed by a flag down to test those lines. These are what I will be watching for.
Happy trading.

SOLD or The Importance of Stop orders

Yesterday's potential inverse head and shoulders pattern died an untimely death this morning. A gap down below all support stopped me out at the open for a small loss. Take a look at the chart below and you can quickly see how important the stop was. GDX went down another 3.6 % after I was stopped out.
Stops are important, not only to save your cash when a trade goes against you, but being stopped out allows you to put the trade behind you and plan for the next one. I'm not staring at the computer screen trying to will GDX to go up. Instead I'm watching for the next set up. It doesn't matter if I buy the next one higher or lower, it only matters that it goes up after I buy.

So now GDX is below all of the support for the past 22 months. It could go a lot lower fast. I need to wait for an obvious flag to buy now. During the three month meltdown of 2008 there were four profitable buy flags and two breakouts above a rising channel, all of which were good buys, so even if it heads down from here, there can be several good buys along the way.

BOUGHT !

In yesterday's post I described the various support levels under the current (yesterday's) price. The first support was tested from above and underneath for several hours before it finally broke and when it broke, it plunged. The plunge was said to be because of the release of the last Federal Reserve meeting minutes and the lack of discussion about QE 28 (or whatever number we're on now). We know that it would have happened anyway and that was just the excuse.
The second support held beautifully. GDX went $0.07 below and turned up on very strong volume. HUI went $0.15 below and also turned up nicely. I bought right after the bottom as soon as the turn was confirmed.
Here are the charts for both:

I was expecting this turn because of the very nice inverse head and shoulders which was forming on the charts. This pattern occurs several times a year at major turning points and comes with the advantages of predictable turning points and nice tight stops so there is relatively little risk to the trade. These trades do fail at times but they have a remarkably high success rate of near 80%. As long as you keep a stop loss price in below support, the trade is very safe.

As you can see, the chart for HUI is very symmetrical, with a nice flat neck line. This bodes well for the trade. The shoulder support can be tested several times over the next few days, but often it is hit just once and away it goes. It looks like a five wave decline so it could go up part way to the neckline and then come down to violate today's low slightly before turning higher, creating a multi day flag. I will not be too quick to raise my stop price.
Happy Trading.

Good news for Goldbugs

GDX and HUI surged up above the bottom of the megaphone pattern today. This puts control back in the bull camp for now. GDX and all gold stocks are very over-sold after a month of heading down, so I'm hoping for a nice bounce here, or better yet, a nice new uptrend. Here is the GDX chart for the past 14 days:

After a very brief and very small drop this morning GDX surged up through the upper red support line (which was resistance until today) and went all the way to the upper channel line before consolidating for the rest of the day. HUI did the same, but actually reached the blue resistance line before falling back and closing below both the channel line and the resistance line. GDX has not tested either of the red support lines yet and either of them would make sense from here. If GDX goes up to the blue resistance line in the morning, and then falls, the upper red line may contain any drop creating a bullish flag. A fall all of the way to the lower line and then a turn up would also be a bullish flag, just not as bullish.
A consolidation right were it is tomorrow with a rise and a close over the blue resistance would be immediately bullish.
A five or six day flag will often form in situations similar to this. It could form below the channel line, likely using the bottom support to hold it up, or it could jump out of the channel and form above the channel line, but possibly dipping down to the upper support line by the end of the flag formation.
As noted on Friday, the MACD crossed the zero line today, lending some technical support to both GDX and HUI.
Happy trading.