4 Attachment(s)
GDX Intraday positive divergence
As you might have noticed, yesterday, we had a positive MF divergence, indicating that the bottom might be close, because investors started buying weakness.
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When comparing this move to the past few days, it is however obvious that large buyers are not back in full strength yet.
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We can see in the Figure below that we had two similar events in the past months and although we did experience a small bounce, the downtrend did not reverse.
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I therefore did some further calculations to see what happened after the MF reversed from an oversold situation. I however split this analysis into four cases: since 2011, between 2009 and 2011 (labeled before 2011,) with a MF below the OS level of -1.3% or above the OS level of -1.3% (but still below -1%).
The results are shown below. We can see that between 2009-2011, when GDX was mainly in a bull market, it was good to buy weakness below -1% or even below -1.3%. However, since 2011, buying extreme weakness (a MF below -1.3%) has let to losing trades (2/3 of the trades were losing trades.)
Today is such a case: we are in the conditions of the red curve. Hence, the positive divergence of yesterday is not a sign that the sector will reverse. It is better to wait for a buy signal to be issued and even then, we need to be very cautious as we are heading into what will probably be disappointing PM miners earnings.
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Note that the Oversold level indicated in the RT system includes a porosity factor.