It’s been a volatile week in the market after we saw the largest takedown in the S&P-500 (SPY) since 2008. Unfortunately, while many thought that the gold juniors (GDXJ) would provide a shelter from the storm, the metal itself has been the only place holding its value. Despite a nearly 10% rise in the gold price (GLD) thus far this year, the Gold Juniors Index is down almost 10%, a roughly 200 basis point underperformance vs. the metal. The good news, however, is that the underperformance is beginning to get a little extreme, suggesting some possible mean reversion on the way. The key, however, is that the bulls must defend the $36.00 level at all costs. A breakdown below this level on a monthly close would be bearish.
While we haven’t seen the baby out with the bathwater forced selling in miners that we did on February 28th, yesterday was certainly not a great day to be overweight the group. The Gold Juniors Index was down over 5%, shedding more than half of its prior week’s gains, all while gold has hovered high above all other asset classes as a safe haven. Fortunately, the index has found itself sitting near a pivotal support level following this decline, with the monthly moving average (white line) coming in near the $36.50 area. There are no guarantees that the index will bottom out here, but we’re finally getting closer to a low-risk buy opportunity in the GDXJ as we hover just above the $36.00 level.
If we look at the big picture for the GDXJ, the bulls still have lots of work to do to confirm a new bull market for the small miners. As we can see, we have multi-year resistance at the $50.00 level, and this area has been a brick wall since late 2013. The first sign that the good old days of 2009 and 2010 for the miners are back would be a quarterly close above this pivotal level, suggesting a change in character for the miners. This would finally confirm the multi-year breakout we saw in gold last year and would place the GDXJ on a bullish posture for its yearly chart for the first time in over a decade. Until this happens, however, choppy trading and nasty takedowns like we’ve seen will likely continue to be the norm.
As noted, the Gold Juniors Index is finally beginning to get oversold, but I don’t see any reason to be overly aggressive just yet. If we could see a pullback below the $35.70 level, however, this would likely provide a decent area to begin to scale into long positions in the index. While I am not long the index currently and continue to sit tight on new entries, I would strongly consider starting the first leg of a new position if we were to trade below $35.70 on the GDXJ before the end of March. The bulls may be in control of the monthly chart, but volatility is here to stay in the miners, and I see no reason to pay up when the tides are rough. However, as long as the bulls can play defense at $36.00, pullbacks should be embraced.
(Disclosure: The author is GLD)
The VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at $37.01 per share on Tuesday afternoon, down $0.05 (-0.13%). Year-to-date, GDXJ has gained 8.44%, versus a 7.01% rise in the benchmark S&P 500 index during the same period.
GDXJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #10 of 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.