Mining For Long Setups in Gold

From the desk of Steve Strazza @Sstrazza

Gold (GLD) broke out of a multi-year base last year and has more or less been trending higher since. No new news there.

But as JC explained in a post last week, Gold Miners (GDX) have finally broken out of a 7-year base as well after recently taking out resistance at key prior highs.

Today we're going to take a deeper look at the space.

We love setups like the one in Gold Miners right now. Not only did GDX resolve higher from a massive base but there is also a hefty amount of price memory at the breakout level which should act as solid support going forward.

Click on chart to enlarge image.

Our risk management level for GDX is 31 and as long as we remain above that level we think 43 is next and over the long-term price will likely test its 2011 all-time highs at 62. But we'll worry about that once it matters. We need to get to 43 first.

Price has been consolidating constructively above this critical level of former resistance for about two weeks now, with a successful retest at the end of last week.

Here is a closer look, this time with a daily chart.

We believe this continuation pattern eventually resolves higher in the direction of the underlying trend.

We also analyze a variety of intermarket ratios to see whether or not risk-appetite for Precious Metals is confirming the moves we've seen from Gold and the Miners. Many of them, particularly Silver vs Gold - which has been making new record lows while Gold and the Miners make new highs - have not looked very compelling at all.

We need to start seeing these ratios turnaround and confirm the strength in Gold if its current rally is to have staying power.

Here is one that's showing early signs of just that, the Junior Miners (GDXJ) vs Gold Producers (GDX) ratio.

Notice that it also broke to new lows recently, but has since reversed higher, confirming a failed breakdown at its all-time lows from 2015.

If Gold is going to keep grinding towards those 2011 all-time highs, this ratio is likely to hold above this support zone around 1.20. In fact, we'd actually expect it to rally significantly higher as the good old gold bug animal spirits gradually return to the space and start to bid-up higher-risk assets such as the Junior Miner stocks and Silver (SLV).

As they say, from failed moves come fast moves, and it wouldn't shock us one bit to see that happen here.

The outperformance had been in the large Gold Producers, some of which we've already outlined trade ideas in over the past few weeks such as Newmont Mining (NEM). Most recently, we outlined bullish setups in some of the Canadian Miners which you can read here.

But now that the weight of the evidence has shifted towards a likely trend reversal in this ratio which would favor the Junior Miners, we want to focus there for new setups.

We scanned through the components in the Junior Miners ETF and focused on those names currently near or above their 2016, or even better, 2011 highs. These years marked the peaks in the most recent cyclical and secular Precious Metals bull markets.

Unlike the Gold Producers, GDXJ is still trapped beneath its key 2016 highs. Thus any Junior Miners above their highs from those periods are definitely some of the leaders, and we always want to bet on the leaders.

Let's dive in and take a look at some setups in these strong stocks.