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Gold & Gold Stocks Are Approaching Critical Support

We Have Met All Objectives In Price & Time For The Current Gold Stock Bear Market

The current bear market in gold stocks began in September 2011, right after the metal made its all-time high above $1900. If we do not make a new low in the XAU, GDX and other gold stock indexes, then the bottom will turn out to be December 2013. However, if we should make a new low within the next couple months, we will have extended the gold stock bear market to the 2nd longest on record, beaten only by the 1983 mining stock bear market. For all practical purposes, the 62% drop in value that occurred last December met all downside targets. If we should make a new low, it should only be a marginal new low by a percent or two anyway, so whether we do or don't make a new low, it is not that important in the long term.

Gold Is Nearing Critical Support

This is a stockcharts.com chart of December Gold. To get commodities to come up instead of stocks, just time "^" (carrot) and then the symbol (GC) then the month (Z for December) and 14 (year 2014). This is the weekly chart. May I point your attention to the June 2013 low at $1200, the late August 2013 high of $1438, and then the October 2013 low of $1261. From that support level, gold rallied a couple weeks to top at $1364.80. Then on a retest of the $1261 support level, gold broke down in November 2013 and worked lower into a December low and double bottom, just under $1200.

Comparing recent price action in the gold metal, I see the September 2014 time frame correlating very closely with the November 2013 time frame. The December 2013 bottom, is similar to the June 2013 bottom. The August 2013 high of $1438, correlates to the March 2014 high of $1391. The $1261 support area in October 2013, is similar to the $1240 support reached in June 2014. The rally in 2013 lasted only 2 weeks to above $1350, while the 2014 rally would last 6 weeks, to a high of $1347.50. Back in 2013 in just 4 weeks, the $1261 support level was taken out, while in 2014, it took 9 weeks to knock out the $1241 support level. The important thing is that when the $1261 support was taken out, gold bottomed within $70, in about 4 weeks, back in late 2013. At present, I see the $1241 level not being broken by more than $50, and expect to bottom within 4 to 8 weeks of taking out that support level. And just like the gold market flipped back and forth in November and December 2013, while it tried to form a bottom, I see similar action beginning now. I expect 2-way action both up and down, as gold tries to make a bottom between now and early November 2014.

Michael Noonan of Edge Trader Plus, has an excellent article as usual, explaining where gold and silver are after this week's trading, click here. After explaining how silver has broken down, Michael Noonan notes that although we have fallen for the past 3 weeks in gold, this week has the tightest trading range, indicating buyers met the sellers and prevented the $1200 support area from being tested. Mr. Noonan notes the strongest buying volumes occurred on Friday, and lends some hope for a bounce to occur this coming week. What I find striking, is that the gold metal only fell 1% this past week, yet the mining stocks were taken out and shot. Unless gold starts falling hard in the next couple days, the gold mining stocks will have fallen too far, too quickly to the downside, and should stage a sharp, quick recovery.

GDX Is At Major Support Around $22.50

This is the weekly chart of the large gold mining stocks ETF (NYSEARCA:GDX). Notice how in early June 2013, GDX bottomed at $22.00 and then traded over $30 within 7 weeks. After topping GDX rolled over and then again stopped falling in October 2013, at $22.66. This time GDX retraced back to $26.66 within a couple weeks, a gain of $4.00. But then in November 2013, the $22 support level gave away and a low in December 2013 of $20.18 was recorded. Once GDX bottomed, it would rally for 12 weeks to a high of $28.03, nearly an $8 gain off the bottom. Then for several weeks, the low $23s was excellent support before falling to $21.93, running stops just under $22. The rally that followed carried us to $27.78 before rolling over and finally ending this week at $22.66 with a low of $22.49. Again I anticipate excellent support showing up in GDX between $22 and $22.50. GDX has fallen hard for 3 straight weeks and there is a high probability that GDX bounces back up over the next 1-2 weeks, even if GDX is going to fall further. A bounce in GDX would correlate with a bounce in December Gold from the $1190 to $1205 support level of at least $50. This should pull GDX back above $25. However, after a bounce, December gold should retest and could possibly break down to a marginal new low, pulling GDX with it. At this time, I don't anticipate December Gold taking out support under $1180, so I don't see GDX retesting the $20 support area from last December.

GDXJ Has Good Support From $35 To $37

Like the previous GDX chart, the Junior Gold Mining ETF (NYSEARCA:GDXJ) weekly chart, shows similar price swings off support. However, the Junior miners have slightly outperformed over time. GDXJ should have closed Friday at $35 instead of $36.34, based on recent action seen in GDX. I expect for GDXJ to continue to outperform GDX going forward because the GDXJ is farther off its highs than the GDX is, and the Juniors should be bid up on potential buyout rumors soon after we bottom. Back in June 2013, GDXJ bottomed at $32.84, and again at $35.56 in August. The October 2013 low was $34.81 before falling to the $28.87 low of December 2013. In the Spring of 2014, GDXJ tried to bottom in the low $35s but ultimately bottomed in late May 2014 at $32.79. The current selloff has made a low of $36.19 hit on Friday. Going forward I would anticipate GDXJ should bounce off the low $35s, and again at $33.50. I do not anticipate the May 2014 low of $32.43 being violated on the current selloff without first experiencing a significant rally. Should GDXJ fall to $35, the triple leveraged Junior Mining ETF (NYSEARCA:JNUG) that closed on Friday at $15.14, could fall to about $13.50. If the bottom in GDXJ is $35, then GDXJ should quickly rally 25% in one month, and 50% off the bottom, within a couple months. That would rally JNUG from $13.50, back to $23.60 and then $33.75. I am hopeful that JNUG does not have to fall below $13.50 in the near future, so that a quick $5 pop out of the bottom (a typical correction seen even while still in the bottoming process) would get JNUG back to $18.50.

However, if GDXJ should fall to $32.50 then JNUG could fall to the low $10s. That would allow for a short-term rally back towards $18 and then slightly above $25.

During the bottoming process, expect $4 to $5 pops in JNUG off lows, so $15 could see a correction back up to $19 to $20, $13.50 could pop back to $17.50 to $18.50, and $10 would bring us back to $14 to $15 on corrective pops.

Summary

On a Friday, 3 weeks ago, December Gold was holding support in the $1280s and the gold miners were bottoming and looking to begin a move higher. But then on Sunday night, algo traders used outsized orders to force the market below support at $1280 and stops kicked in to take the market lower. When the support at $1240 gave way in similar fashion during the thinly traded overnight session (the Globex), there were many more stops hit. However by now, the bulls have been decimated, and it is the bears who now must be worried about a possible short-covering rally of $50 or more in gold. The most logical spot to start the rally in gold, is a little above or below $1200. I still hold to my prediction of a $1206 low in December Gold.

Once the short-covering rally is completed, the bottom will be retested and there is probably a 2 to 1 chance the bottom is broken, at least marginally to run the stops. I won't say what happens next as we can cover that in coming weeks after we first see the short-covering rally and then begin the retest of the lows. The level that December gold stops dropping and the magnitude of the bounce off the bottom, will tell us a lot about how the retest of the lows should turn out. Should be a fun ride for all, and quite profitable for the nimble.

Disclaimer:

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: The author is long GDX, GDXJ, JNUG.