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GDX and the Tricky Trade in Gold

GDX is bouncing off of its annual lows

by 1/3/2012 8:00:26 AM
Stocks quoted in this article:

If there were an Exchange-Traded Fund (ETF) of the Year award, then the Market Vectors Gold Miners ETF might be the going-away favorite.

As the Market Vectors Gold Miners ETF (GDX) has oscillated around its 200-day moving average, the ETF has been a hard-to-pin-down trade for many short-term traders. With buying pressure creating overbought conditions in bull-market territory, and selling pressure tending to produce oversold conditions in bear-market territory, the choppy nature of GDX over the final quarter of 2011 made it difficult for active investors to keep up with -- to say nothing of get ahead of -- the moves in GDX.

That said, with GDX bouncing off its lowest levels of the year in late December, the effective high-probability strategy going forward may become more clear in the coming weeks and months. Should GDX continue to trade below its 200-day, strength could be an opportunity to sell and weakness a temptation to avoid.

This is high-probability standard issue: buying weakness above the 200-day and selling strength below it. And as GDX moves from oversold territory below the 200-day to more neutral levels, traders may want to be wary of the temptation to climb on board on the long side until that bull/bear barrier is crossed. The tendency for markets to underperform in the short term after becoming overbought is significant enough. When those markets are trading in bear market territory -- i.e., below the 200-day moving average -- those tendencies toward underperformance after becoming overbought or making new, short-term highs can be even more pronounced.

The components in GDX may be worth a look for short-term traders. Traders interested in weakness above the 200-day may want to keep an eye on the pullbacks in stocks like Yamana Gold (AUY), or for potential reversals in Royal Gold (RGLD) and Randgold Resources (GOLD). These latter two stocks experienced significant intraday selling on Friday, which may hint at further weakness when markets open today.

Below the 200-day, the potential for short-term weakness in gold mining stocks could mean an opportunity to trade on the short side in markets like Silver Standard Resources (SSRI), which is closing in on overbought territory after a gain of more than 5% on Friday and a second consecutive higher close. Another stock that is trading toward levels where sellers have historically overwhelmed buyers in the short term is Aurico Gold (AUQ). Shares of AUQ finished higher by more than 2% on Friday, gaining for a second day in a row.

The stocks and exchange-traded funds in today's report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com

Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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