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Gold Stocks Rolling Over to Early Summer Low


The alleged safe-haven bid for gold induced by the situation in Ukraine could be starting to come out of the market.

Last week my firm speculated that a decline in May would create an opportunity. The conclusion: The near-term prognosis looks cut and dry. Until proven otherwise, the short-term trend is down. If that's confirmed in the coming days, then let these markets fall to strong support before buying. The alleged safe-haven bid for gold induced by the situation in Ukraine could be starting to come out of the market. Regardless of the cause, the charts for the miners (and gold) continue to urge caution as lower prices are likely ahead before the next major turn. 

The Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) (shown below) have had a very weak respite since the end of March. Both markets failed twice at their 50-day moving averages. The second failure occurred a few days ago at now-declining 50-day moving averages. The markets reversed before even touching the moving averages. The path of least resistance is definitely lower. 

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I strongly believe the next low for GDX and GDXJ will occur at or very close to the December 2013 lows, and it will be a major low, similar to the June 2013 and December 2013 lows. It's presumptuous to say, but not when you take into account the next chart, which many of you have already seen. This chart helped us spot the last two major lows. It may not tell us where the next low will be, but it strongly argues that the next low will likely be the final low in this arduous bottoming process, which is already in its 11th month.  

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So how could this next bottom play out? No one knows for sure, but we'll take a stab at it in this next chart and point out a few things. Note how the 200-day Bollinger Bands were far apart when GDXJ first peaked in 2011, yet tightened before GDXJ began to breakdown. Currently, the 200-day bands are far apart and GDXJ is yet to touch either side. Perhaps GDXJ will touch the lower band next and then a month later touch the upper band. These bands will need to pinch in before GDXJ attempts a major breakout. Volatility continues to be low, as demonstrated by the ATR (average true range) indicator. It's declining and near a multiyear low. Until that reverses, don't expect any huge breakout in GDXJ. 

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With respect to our projection, let's keep in mind that GDXJ rebounded 59% in two months in the summer of 2013 and recently surged 53% in less than two months (from late December to mid-February). Our past historical work shows that the large-cap miners usually recover 50% in four to five months after the bottom. Hence, a move for GDXJ from 30 to 50 (more than 50%) in four to five months would be in line with historical tendencies.

One security I'm looking at is the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JNUG), the 3x long GDXJ ETF. This is essentially an option on the already volatile GDXJ. JNUG is supervolatile, but the upside potential is tremendous. During that less-than-two-month period in which GDXJ surged 53%, JNUG returned 210%! I'm looking to buy that in the coming weeks when the downside risk becomes very low. I'm also looking to buy several juniors I believe have exceedingly strong upside potential over the coming quarters and years. In any event, be patient over the coming weeks and let this final sell-off run its course.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
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No positions in stocks mentioned.

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