Gold and gold stocks remain in the larger correction that began almost 12 months ago. However, both became quite oversold, and a short-term low is now in place.
Gold bottomed just below good support at $1755. It hit a low at $1750, with its net speculative position a hair from a two-year low. Open Interest is at a two-year low.
Rally targets are the 50-day and 200-day moving averages at $1833 and no higher than $1850.
The setup for the gold miners is similar. They should be able to retrace a portion of the losses in June.
Days ago, my breadth readings showed that 0% of the HUI and 0% of the VanEck Vectors Junior Gold Miners ETF (NYSE:GDXJ) stocks closed above the 20-day and 200-day moving averages. This type of extreme oversold condition usually leads to a rebound.
GDX has upside to $37 and faces some resistance from the moving averages at $36. GDXJ faces moving average resistance at $51 and lateral resistance at $53.
If gold and the miners could rally past the May highs, it would signal the correction is over. That is not my expectation, but it’s important to cover all possibilities. Keep an eye on the sector-leading indicators, which we covered in our last piece.
These indicators can start to diverge before a new leg higher begins. As we move later into the summer, these indicators can give us a better sense of how much longer the correction will last.
We can also consult history.
Based on market context and recent price action, the two historical comparisons are the corrections in 2004-2005 and 2016-2018.
The current correction is following an average of the two while being closer to the 2004-2005 version than 2016-2018. It’s also noteworthy that silver has held up much better than it did during the 2016-2018 correction.
Depending on your goals, risk tolerance, personality, and cash levels, you can take advantage of the current weakness, or you could wait for the larger correction to mature and take advantage of quality juniors at potentially more oversold levels.
Note that every decision does not have to be dictated by the sector trend.
Some stocks will bottom before the sector, some with the sector, and some even later. Buying and accumulating should be done on a company-by-company basis based on a combination of fundamental value and simple technicals.
In my experience, buying fundamental quality at oversold points and then holding for several years is how to earn returns of 5-fold and more.
I’ve positioned myself in companies with the best combination of upside potential and fundamental quality. These are companies you can buy and hold for a few years that have the potential to be 5, 7, and 10 baggers after gold breaks past $2,100/oz.