Last Monday, 1/13/14, the Junior Mining Stock ETF (NYSEARCA:GDXJ) significantly outperformed GDX and I wrote an article on it, found here. That outperformance continues. On Friday, 1/17/14, Jon Najarian said to jump on GDXJ now, click here, citing the higher beta that GDXJ offers over GDX. I agree with Najarian and plan to buy GDXJ on dips this coming week.
What is not shown on the above chart is the fact that GDXJ topped at $141.69 when gold hit its all-time high above $1900 back in September 2011. The recent low of $28.82 means that GDXJ lost 80% of its value at the bottom. A Fibernacci retracement of 38.2%, 50% and 61.8% of the drop, would project targets in GDXJ of $72, $85, and $98, so there is significant upside potential in GDXJ, from current levels.
The only caveat on a very short-term basis is the Money Flow Index shown at the very bottom of the above graphic. We are approaching the 80 level, showing we are overbought on a very short-term basis. At the recent lows, the indicator was below 20, a significant buy zone. We are now approaching the precarious 80 level, and may have some difficulty going straight up to higher levels without having at least some consolidation.
Looking at the above chart, you will notice that we gapped up on Friday. Before we move significantly higher, one would expect that over the next couple days, we would return to the gap area and possibly partially fill the gap slightly. Therefore, one should get a good buying opportunity to add to GDXJ, if it should correct back to Friday's low of $35.18. To buy at $35.00 or slightly lower would be ideal. I am going to use the rally that began in late 2012 as a guide. Look at the chart below:
We have rallied for four straight weeks, that consist of 2 white candles, a hanging man, and a large white marabozu candle this past week. A marabozu has a large body with virtually no tails. The bullish marabozu was formed by opening on the low of the week and closing out at the high of the week. This is a continuation pattern which projects a continuation for at least two more weeks. However, we could get some corrections along the way. If we should gap up on Tuesday, when the markets reopen, it will be hard to get much traction the remainder of the week if we don't do some bit of retracement. That is why I am looking for a small bit of retracement beginning Wednesday, 01/22/14, which should retest Friday's low. The first time back to $1268 in gold could stop the rally for a day or two while the bears mount their assault on gold prices to stop the bulls from breaking on through. The bears will not give up without a fight, and $1268 should be a major battle ground. I would look for large computer sell programs where 1000 to 2000 contracts hit the market at one instant during the night sessions of Globex when trading is at its thinnest and most vulnerable to attack. The bears will do everything to stop the rally and we might again even see another flash crash, if the bears are able to pull it off. The market is still positioned short until forced to cover on a move above $1268, and big money will try to draw a line in the sand at $1268, and keep the bulls from breaking on through. It may take a correction back to the high 1230s, and a regrouping of the bulls to set up the foundation needed to bust on through. In any case, it should be fun to watch the battle unfold over the next couple weeks.
If we burst on through $1268, it is prudent to liquidate all DUST or other short gold positions immediately, in my opinion. Until $1268 is taken out, one could expect to see some two way action in the near term. Looking at the 10 week rally back in July through September 2012, there were lots of retracements, especially after a strong week up, like we just got now. Instead of falling all the way back to $35.00 in GDXJ, we might only be able to retrace half that much, to maybe $35.75. In that case, instead of a marginal new high being hit on Friday 1/24/14, creating another hanging man candle, we might have enough momentum to push towards $38 and end up with a nice white candle body next week. That would project a small rally to $40 the following week, for a possible short-term top in GDXJ.
The two most likely retracement levels, to pick up significant shares of GDXJ, I project to be $35.75 and at $35.00. In any case, having completed 4 straight up weeks, is a significant accomplishment which does project higher prices into the medium and long-term. If we should stop rallying in GDXJ near $40, since we are coming out of a significant bear market, the first move from the lows, should be an a-b-c correction. The price of $40 would be mark the first top at "a", followed by a corrective wave "b" back to maybe $34 or a little lower, followed by an up wave "c" that is higher than the $40 top of wave "a", maybe up towards $50 to $55 where major resistance resides.
In July, GDXJ made an initial wave "a" thrust up from $32.84 to just under $45, followed by a wave "b" low of $35.56, and a wave "c" high of $54.56. One could see a similar a-b-c pattern now. The implications are that all dips are buys for the time being, as one rallies into the high of wave "a" forming now out of the major bottom low. Then, one can buy again on the correction into the corrective "b" wave low, and one can ride up to the high of wave "c".
I will end with a couple GDX weekly charts. The first chart covers early 2008 to early 2011, and the second chart covers early 2011 to the present early 2014. The first chart shows the various retracements that occurred as we bottomed in 2008. The second chart is the current action going back the last three years where one can see that the rally has just begun in the gold miners! The charts are as follows:
The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.
Disclosure: I am long GDXJ.