first majestic silver

NYSE Arca GoldMiners Index (GDM)

September 2, 2013

I spent the decade of the 1960s in and around Los Angeles (Ah! them were the days).  There was a music radio station that focused on the “oldies” (yes, there were oldies, older than the 60’s).  I still remember their slogan, which went something like this: “First with the hits of yesterday, last with the hits of today”, 

Being a simple type I sometimes have a hard time keeping up with the latest in the investment industry.  I guess I can say I’m probably the first analyst pushing the techniques of yesterday and the last pushing the techniques of today.  So it is with investment products.  The various derivative products that keep being introduced are sometimes just too exotic or difficult to really understand so I refrain from trying.  Lately there has been one Exchange Traded Fund (ETF) which seems to have caught on with the gold speculating community, that is the Direxion Daily Gold Miners Bull 3X Shares (NUGT).  Their stated goal is to “seek daily investment results, before fees and expenses, of 3 times of the performance of the NYSE Arca GoldMiners Index (GDM).  This 3 times performance seems to have really got the speculative juices flowing and the NUGT has become much talked about lately.

Today I thought I’d just very briefly touch on gold and instead focus on a technical analysis (simple, using the techniques of yesterday) of GDM.

GOLD

Although the chart suggests that gold has been in a rally mode lately it is still below its negative sloping long term moving average line.  And although my long-term RSI suggests a positive trend it is still comfortably inside its negative zone.  Without any more analysis the long-term is still in a BEARISH position at this time.

INTERMEDIATE TERM

I prefer the intermediate term in my analysis as it is the easiest to analyze and provides one with enough guidance to profit from bull or bear moves, whether those moves are intermediate term or result in an eventual long term.

The first thing that jumps out at you from the intermediate term chart (shown) is the very distinct positive divergence at the late June bottom (it should be noted that the long-term chart did not have a similar positive divergence).  On such an emphatic divergence signal an aggressive trader might have acted on short-term signals on the bull side.  That would have come at about the $1260-$1270 level. 

The intermediate term turned to the BULLISH side during the second week of August with the price above its intermediate term moving average line and the line having just turned to the up side, along with a positive trending intermediate term RSI (although not yet in its positive zone).  The RSI moved into the positive zone on the 23th.  In addition, the short-term moving average line crossed above the intermediate term line in the second week of August for confirmation and that’s where it remains.

I try to be very cautious when analyzing volume action in a stock or Index.  I wouldn’t go into the reasons at this time.  I will just direct you to the volume action in the chart and emphasize the continuing DECREASE in volume activity as the price advanced.  At the very minimum this is a very cautionary indication.

Although there has been a minor correction in the price of gold during this past week we are still in that BULLISH phase but showing signs of a rest period.

If you draw a trend line from the bottom of late June through the top in late August, and another trend line from that same bottom through the bottom in early August you get an expanding wedge within which one might expect the action to be trapped.  There is also a strong support at the $1350 level so one would not need to panic from the intermediate term standpoint as long as the action remains above this support.

So much for gold today.  On with the GDM.

NYSE ARCA GOLDMINERS INDEX (GDM)

Almost all of the analysis I have seen over the past week or so (and going back into archives) seem to compare the performance of the Direxion Daily Gold Miners Bull 3X Shares (NUGT) with the performance of the Market Vectors Gold Miners ETF (GDX).  Both of these ETFs are based upon the performance of the underlying Index, the GDM (but each with a different investment/speculative focus).  Now, it is probably true that over some time period they all act correctly according to their goals, however, on a day to day or intra-day bases there may be considerable differences due to the occasional volatility in speculative trading activities in the ETFs.

Last week the opening price on Aug 27 was 2.08% above the close on the 26th, for the GDM.  The GDX should also have opened 2.08% higher and the NUGT should have opened 6.24% higher (3 X 2.08).  In reality GDX opened 2.86% higher and NUGT opened 7.98% higher, considerably higher than implied by the GDM open.  It has been down hill from there for the rest of the week.  Although the decline in the GDX and GDM for the rest of the week (from the open on the 27th) was 11%, the decline in the NUGT for the same period was 38.5% or 5.5% MORE than the 3X intended performance would suggest.  This may be only a matter of fun with numbers so take it for what you think it’s worth.

For this reason I like to compare an ETF with its underlying Index and not some other ETF which may have as its intention the simulation in performance to the same index.

 

We see a very similar picture in GDM as we saw in gold earlier.  I’ll just run down some significant extras here.

That trading “gap” in mid-April needs to be closed if a bullish trend is to continue.  Such gaps are too often resistance levels.  Below the 875 level we also have a strong resistance from trading over the past few months (see the point & figure chart for a better view.  The Index is reacting from the long term moving average line and although still above the intermediate term moving average line that line is still relatively flat and could reverse back to the down side with only a little more negative Index action.  The intermediate term momentum indicator has just inched below its neutral line and is now very slightly in the negative zone.  From a short term perspective the Index has dropped below its short term moving average line and the line has turned downward.  The short term RSI (not shown) has just moved into its negative zone.

What this all seems to be saying is that at this point in time the short-term is BEARISH while the intermediate term, although still BULLISH is showing signs of weakness.  This is not the time to be an aggressive bull in the GDM.

Not mentioned above, we have a reverse Head and Shoulder (H&S) pattern in development.  This can be clearly seen in the point and figure chart.  A break by a move to the 875 level on the GDM sets up more than one signal.  The reverse H&S pattern would then project to the 1125 level.  This 29% move by the GDM would indicate a possible move by the NUGT of 86%. 

The Point and Figure chart suggests that a move to the 875 level would trigger my double signal that I require for a valid Point and Figure break.  The first is a move above 2 previous highs and the second is a move above an established trend line.  Both of these would be accomplished by a move to 875.  Should the break come on the next Index up move (without any further up and down gyrations), then the projection would be for a move to the 1325 level.  This 51% move from the break-out level indicates a possible move by the NUGT of 153%.  I have observed that the initial Point and Figure projections are usually about 80% correct.  Further projections as the trend progresses have a lower and lower accuracy.  Don’t jump the gun but wait for the break to occur.

Everything usually comes back to the performance of gold itself.  Gold and gold Indices do not always move together but one must assume that they do, or at least if one should move differently than the other then things will balance out in the end.  Also, at times such as we are living through presently gold moves more on world events which cannot be predicted on a day-to-day bases.  This is where looking at longer term indicators rather than short term ones is more beneficial during volatile periods.

********

I welcome comments and/or suggestions.  I read them all although I may not have time to answer them all.  My email address is [email protected].

Merv is a retired Aerospace Engineering consultant.  He is also a retired market technician with over 40 years of market experience and research.  Merv received his certification as a Chartered Market Technician (CMT) in 1992. Developer of many technical techniques and programs which he has been using in his previous Technically Speaking with Wil-Arm and Technically Precious with Merv commentaries posted throughout the globe.  Developer of several gold and silver Indices, Merv continues to update his Merv’s Gold & Silver 100 Index and Merv’s Penny Arcade 50 Index and reviews them during his periodic on-going Technically Precious commentaries. 


In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
Gold IRA eBook

Gold Eagle twitter                Like Gold Eagle on Facebook