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Paul Mosgovoy
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  • Gold Market Melee 0 comments
    Jul 18, 2014 11:20 AM | about stocks: GDX

    Melee: A confused fight, skirmish, or scuffle. A confused mass of people.

    Whether or not anyone is confused is yet to be seen. At the same time, there is no doubt that it is a skirmish.

    Let's look at the Market Vectors Daily Gold Miner ETF (NYSEARCA:GDX) from both sides: Bull and Bear

    From the bull side first:

    The weekly chart of the GDX shows that there has been a run-up in price action that has lasted six weeks before this week's retracement.

    (click to enlarge)GDX Weekly Chart

    Chart by TeleChart

    The move has taken the GDX all the way up to the bottom of the trendline shown in the chart. There is a potential "reverse head and shoulders" pattern formed that would indicate further up-side is ahead.

    Note the measured move target for that pattern.

    The two large volume bars for the week can be viewed as preparation for an on-going move higher.

    That is a brief assessment of the bull case.

    Now the bear side of the equation:

    Looking at the same weekly chart above, we see that the down-trend has been challenged but not decisively penetrated.

    Volume increased significantly in last week's move but there was little net upward progress. Volume is increasing again this week and there is still little net upward progress: Warning signal

    Taking a quote (with permission) from Andrew Waldock (www.commodityandderivativeadv.com/) we find out how the professional traders are viewing the situation:

    "The gold and silver markets are displaying a classic example of the interaction between commercial and retail traders. Another way to look at this is the battle between professional and amateur traders. No different than a poker game, the pros know how to flush out the weak hands and collect the pot on the table. "

    The specific action that he is referring to was the thrust lower that took place in late May and then the subsequent move higher that is taking place now (with the professionals selling into the current move).

    Using this bit of information, the price action takes on a different look.

    We can see that what may be happening at the trend line is distribution and/or positioning short.

    The amount of volume being expended with little net progress upward supports the notion that there may be a change of hands taking place.

    The real answer will not be known of course until it is all over and the move (whatever direction) has been completed.

    With this kind of a scuffle (i.e. melee), one might want to be careful with this market. Violent moves can happen in either direction before a definitive (multi-month sustainable) move is established.

    At this point, the more probable trade is in a completely different market: The Small Cap sector that is represented by the iShares Russell 2000 ETF (NYSEARCA:IWM) and the corresponding short fund the Direxion Russell 2000 Bearish 3X ETF (NYSEARCA:TZA).

    Disclosure: The author is long TZA.

    Additional disclosure: For illustrative purposes only. Not investment advice.

    Themes: Gold, IWM, TZA Stocks: GDX
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