We Have Liftoff! Miners Soar!
Who’s enjoying their immediate profits from the long position in mining stocks? Whoa, that’s a lot of hands… :)
To be precise, the GDXJ moved higher right after the opening bell, but it then declined in about 10 minutes, and it then stayed below Monday’s close for about an hour, so the odds are you managed to go long at quite favorable prices.
Either way, the junior miners then continued to move up throughout the day, ending at the daily high, which means that everyone who bought yesterday (just a day after we closed the 9th profitable position in a row) before the final minute of the session is already profitable. Congratulations!
And since gold and silver are rallying in today’s pre-market trading, it looks like more upside – and profits – await.
Gold is a bit above yesterday’s intraday high, and silver is visibly above it.
Silver outperforming gold might be viewed as something warning of the upcoming decline, but based on other indications, it seems that this rally has room to run. One good reason is the very short-term breakout in the GDXJ.
“Enough is enough!” – that’s what the above chart is saying.
The recent move lower has been similar to what we saw in May, and I used orange and green ellipses as well as the trend channels to emphasize this similarity. The key thing about this analogy is that once we saw a breakout above the declining trend channel in late May, the decline was over – at least in the near term.
The RSI based on GDXJ’s daily chart was just close to 30, thus flashing a buy signal. And when we saw these signals in the past, the rallies that followed were bigger (sometimes much bigger) than what we saw so far this week. Consequently, the GDXJ is likely to move higher in the near term.
Besides, we get the same indication from the GDXJ to SLV ratio chart that I elaborated on yesterday.
One of the great ways to check a given market’s (works with ETFs or stocks, too) relative performance is to look at its ratio and how it performs. Then, we can analyze if the ratio itself is doing something regular or something meaningful. And we can estimate how effective it was to follow any indications that this ratio gave us.
Let’s do exactly what with the junior miners to silver ratio. To get an apples-to-apples comparison (with the same closing hours), I’m going to use the GDXJ and SLV ETFs.
Yes, the drop in the ratio was excessive – that’s clear at the first sight. But was it too excessive?
Yes! That’s what the RSI indicator is showing us. Indicators are a very useful way to detect if what we see now is normal or if it’s something that’s likely too much (or too little). In essence, they are mathematical transformation of price movements (sometimes volume is taken into account), so that they isolate what’s most important.
What’s important in our case, is that the RSI moved below 30 in a clear manner. That happened only a couple of times in the recent past and in almost all cases (3 out of 4), sizable rallies in the GDXJ followed.
That’s what happened at the May 2022 bottom, at the September 2022 bottom (which was also the yearly bottom), and at the December 2022 bottom. And it’s likely to happen also this time.
There was one time – in the second half of June 2022 – when the move below 30 in the RSI triggered only a tiny and brief upswing, but that was when gold was about to slide, and the USD Index was about to soar.
And since gold is not sliding now – and it’s rallying instead – this single analogy doesn’t really apply.
All three remaining analogies point to rallies that are bigger than what we have seen so far this week.
Conclusion: junior miners are likely to move higher, increasing profits from the current long position in the near term.
In fact, given final-hour strength and today’s pre-market rally in gold and silver, it seems that our profit-take levels might be reached as early as this week! I can’t promise that, of course, but I do promise to keep my subscribers informed and report as soon as I think that taking profits off the table and (most likely) switching to a short position is justified from the risk-to-reward point of view.
Great times are ahead! Stay tuned!
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Przemyslaw K. Radomski, CFA