Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
It’s been a contrasting story between stocks and gold this year…
From the start of 2022, stocks sold down heavily. From early January to its March lows, the S&P 500 dropped by around 15%.
While stock investors were suffering big losses, those who owned gold mining stocks were enjoying some big gains.
In just five weeks, the VanEck Gold Miners ETF (GDX) rallied almost 40%! (You can see how strong that rally was in the GDX chart below.)
The inverse correlation between gold and stocks isn’t anything new.
That’s why stock investors hold gold as downside protection for when their share portfolio takes a hit.
But today, I’m going to discuss the GDX action from last week.
While shares were selling down again, so was GDX.
Let’s look at the GDX chart…
VanEck Gold Miners ETF (GDX) ETF
When we last checked in on GDX, it was tracking sideways (red arrow on the chart).
The 10-day moving average (MA – red line) was closely tracking the long-term 50-day MA (blue line).
The strong rally in GDX began when the 10-day MA burst higher above the 50-day MA.
It was a strong rally based on the speed at which the 10-day MA broke above and away from the 50-day MA.
The Relative Strength Index (RSI), on the lower half of the chart, also signaled an emerging uptrend. The RSI broke back into the upper half of its range (above the green line) at the same time the MAs crossed over.
After peaking in early March, GDX briefly retraced before rallying to its current, yearly high on April 18 at $41.60.
At the same time GDX made its new high, the RSI made a lower high. The divergence between the two is marked by the orange lines on the chart.
Take another look…
VanEck Gold Miners ETF (GDX) ETF
This pattern often precedes a change in direction… which is what happened.
After making that high, it took a week for GDX to drop 10%.
So, what am I expecting from here?
The RSI recently broke below the green line – the first time it has traded below support since the rally began in February.
The steep drop in the RSI shows us how quickly the GDX buying momentum has evaporated this past week. For the current GDX fall to fizzle out, the RSI will need to bounce back above the green line.
But if the RSI stays in the lower half of its range, then this fall could have further to go.
The next test for GDX would be to maintain support at around $34. That was the level at which GDX consolidated in late February before going on to make its March high.
I’ll also be watching our two MAs.
The recent fall has already seen GDX trade below the 50-day MA this past week.
If the 10-day MA crosses down over the 50-day MA, then GDX’s emerging downtrend would start to gain momentum.
Editor, Trading With Larry Benedict
Do you use gold as downside protection?
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