It was a pretty ugly close in the US markets on Thursday with 1.5% losses in both the Dow Industrials and S&P 500. The Dow Utilities bucked the trend while technical weakness in the Philadelphia Oil Service Index has pushed it almost 3% lower in the past five days.
The market internals at 2-1 negative could have been worse but the volume was heavy as the Arms Index or TRIN closed at 2.28 its highest level since the February 3rd low. The futures and Eurozone markets tried to stabilize in early trading but have now turned lower as there were heavy losses in the Asian markets. The stops in the Charts in Play portfolio were raised in yesterday's column in case there was a heavier wave of selling.
Both gold and the gold miners were higher on Thursday with the SPDR Gold Trust (GLD) up 0.34% and the Market Vectors Gold Miners ETF (GDX) gaining 2.64%. For those who are considering buying either of these ETFs, the questions are which has the better risk profile and should either be bought?
Click to Enlarge
Chart Analysis: The SPDR Gold Trust (GLD) had an early low in 2014 of $114.46, which was just below the December low of $114.50.
- For the year GLD is up $13.8% and it has gained 5.3% in the past month.
- The weekly chart shows that downtrend from the April and August 2013 highs, line a, has been broken.
- The weekly starc+ band is at $133.35 with the monthly projected pivot resistance at $135.03.
- GLD had a high of $174.07 in October 2012 and the 38.2% Fibonacci retracement resistance is at $137.03, which corresponds nicely with the August 2013 high at $137.55.
- The 50% retracement resistance is at $144.14.
- As I have noted previously, the OBV formed higher lows (line c) at the early 2014 lows while prices made lower lows.
- This bullish or positive divergence was confirmed when the OBV moved decisively above resistance, line b, in early February.
- The daily OBV (not shown) has confirmed the recent highs and is well above its rising WMA.
- The 20-day EMA is at $128.37 with the 20-week EMA just above $125.
- As of Thursday's close, it is 7.09% above its 50-day SMA with the next significant weekly support at $122.72.
Click to Enlarge
The Market Vectors Gold Miners (GDX) had a late December low of $20.18 and is up 30.8% YTD and 6.8% in the past month.
- The monthly projected pivot resistance is at $29.18 with the weekly starc+ band at $29.48.
- There is trend line resistance, line d, at $30.67 and the 38.2% retracement resistance from the 2012 high of $54.18 is at $33.17.
- GDX is 14.1% above its 50-day MA with the rising 20-day EMA now at $26.07.
- The four-week low for GDX is at $25.56 with the rising 20-week EMA at $24.77.
- In late January, GDX had a low of $22.81.
- The weekly on-balance volume (OBV) formed a slight bullish divergence, line f, at the late 2012 lows.
- The strong move in the OBV through the resistance at line e, confirmed the divergence.
- The weekly OBV is leading prices higher and the daily OBV has also confirmed the highs.
- Thursday's close was just below the daily starc+ band at $27.90.
- There is minor support now at $26.90 to $26.40.
What It Means: The gap opening in GLD on Tuesday leaves short-term gap support now at $128.93 to $131.39 with the tightest support under the February 28th low of $127.15. The monthly pivot at $125.82 is 4.8% below current levels and should be a good level of support. Next upside targets are at $133.35 and $135.03 with Fibonacci resistance at $137.03 or 3.6% above current levels.
The slight upside breakout in GDX on Thursday completes the sideways pattern that has been in effect since late February. The closest stop for GDX would be under $25.56 or the monthly pivot at $25.30, which is 8.9% below current levels. The next upside target is in the $29.48-$30.67 area and then at $33.17.This is 20% above current levels.
For GLD, buying at Thursday's closing price has a risk of 4.8% with the first upside just 3.6% higher. If instead you look at the 50% resistance level just above $144, then the potential reward is twice the risk, which is more favorable.
The risk/reward for GDX suggests a risk of 8.9% with a potential reward of 20%. This is over 2 to 1, but the risk of 8.9% is too high for any one position. Therefore, a lower buying level is needed to reduce the risk in GDX.
I have been expecting more significant pullback in GLD and GDX since the middle of February but waited too long. I would recommend only a half position for the portfolio in GLD and GDX at the recommended buy zones.
How to Profit: For the SPDR Gold Trust (GLD), go 50% long at $131.86 and 50% at $130.34, with a stop at $125.42 (risk of approx. 4.3%)
For the Market Vectors Gold Miners (GDX), go 50% long at $27.02 and 50% at $26.16, with a stop at $25.17 (risk of approx. 5.3%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.