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Gold-Stock Seasonal Plunge

Adam Hamilton
Archives
Sep 25, 2020

The gold miners' stocks have just been hammered, plunging to new correction lows. That shattered their indexes' 50-day moving averages, pounding nails in the coffin of this sector's recent high consolidation. This necessary correction probably isn't over yet. It is still small and short compared to this bull market's precedent, the gold stocks are nowhere near oversold, and they are heading into a seasonal-plunge month.

Seeing the gold stocks rolling over into a correction shouldn't surprise anyone. They enjoyed a great run, as evident in their leading and dominant sector benchmark the GDX VanEck Vectors Gold Miners ETF. From mid-March's pandemic stock-panic lows to early August, GDX rocketed 134.1% higherin just 4.8 months! That powerful and fast upleg left gold stocks seriously overbought, necessitating a correction.

That healthy process to rebalance stretched technicals and greedy sentiment began right away. In the first four trading days after GDX peaked at $44.48 in early August, this ETF plunged 12.2%. The major gold stocks of GDX mirror and amplify gold, which overwhelmingly drives their earnings. So the gold-stock selling ceased with gold's own sharp selloff. Gold had shot parabolic to extraordinarily-overbought levels.

But gold's nascent correction quickly lost momentum, so this metal started drifting sideways in a high consolidation. The gold stocks followed, with GDX meandering between about $40 to $43 for over 5 weeks beginning in mid-August. That truncated gold-stock correction morphing into a much-less-painful high consolidation bred much complacency. Traders mostly assumed the gold-stock selloff had already passed.

That was premature and risky, as I wrote in an essay a few weeks ago arguing that gold stocks were still in correction mode. My contrarian conclusion then was "...with gold stocks remaining very overbought technically, and greed still elevated after an insufficient selloff, a resurgent correction is likely. That could easily extend to 25% in GDX, another 20% lower from this week's levels." That has started to come to pass.

GDX plunged sharply this week, falling 3.7% Monday and another 6.3% Wednesday! That first drop just shattered this leading gold-stock benchmark's 50-day moving average, which is the highest-probability support zone for high consolidations. Once 50dmas decisively fail, selling tends to compound as technical damage mounts. The next stop after 50dmas is 200dmas, and GDX's was way down at $33.15 this week.

Revisiting GDX's 200dma today would make for a 25% gold-stock correction, much more in line with bull-to-date precedent. That seems probable given the technical situation in gold. In last week's essay I dug into gold's overboughtness risk. The gold stocks will keep correcting as long as gold does, with GDX very likely to leverage gold's downside by 2x to 3x like usual. The fat lady has yet to sing on gold's own selloff.

Neither gold nor its miners' stocks are likely to decisively bottom, paving the way for their next big uplegs, until their recent overboughtness is worked off. That can be measured by comparing GDX's daily closes with their underlying 200dma. Dividing the former by the latter yields a construct I call the Relative GDX, or rGDX for short. Considering gold-stock price levels relative to their 200dmas yields great timing insights.

Full article w/charts:
http://www.321gold.com/editorials/hamilton/hamilton092520.html