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For Now, Think Carefully Before Buying Gold

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This GDX technical data makes estimating a bottom for gold almost impossible.

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Major US equity indexes have managed to hold on to gains thus far in the new year, surprising countless traders who were convinced that the "fiscal cliff" resolution rally would be short-lived. The picture isn't entirely rosy, however, given the growing probability of a pullback on Wall Street. With no major economic data releases taking place on the homefront this week, investors will turn their focus to corporate earnings, which could serve as a harsh reminder of the sluggish economic recovery at hand.

Chart Analysis

Gold mining equities, as tracked by the well-known Van Eck Market Vectors Gold Miners ETF (NYSEARCA:GDX), have endured a sluggish start to the new year compared to broad-based equity indexes. Producers of the yellow metal have slumped right alongside gold prices, which have lost much of their luster as improving confidence on Wall Street prompted many to jump ship from the safe havens and into riskier assets, namely equities. GDX appears to be building out support around the $45 level judging by its sideways price action; however, caution should be exercised by those looking to buy in given the longer-term downtrend at hand.


Click to enlarge

The advice here is simple: Don't try to catch the falling knife. GDX has posted lower-highs (blue line) and lower-lows since peaking in mid-September of 2012, which makes picking the bottom virtually impossible.

Investors who are eager to jump in long should wait until this ETF re-establishes support above the 200-day moving average (yellow line). Those who are more speculative buyers should observe GDX as it nears $40 per share (red line), which previously served as a major support level in mid-May and mid-July of 2012.

Outlook

From a technical perspective, GDX appears poised to continue sliding lower until bullish momentum resumes; in terms of downside, the next major support level for this ETF lies around $40 per share. On the other hand, if GDX manages to rebound, the next resistance level comes in at around $48 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Editor's note: This article by Stoyan Bojinov was originally published on Commodity HQ.
No positions in stocks mentioned.
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