GDX Buy Oversold signal

[Pascal]

Since we are now in oversold, a buy oversold signal could be issued at any time.

These are among the strongest signals, but they also generate many whipsaws as they are often triggered by shorts covering. Hence, I would advise to take only a small position at the start and to build the position only if the trade works in our direction. If the PM sector starts to move up, there will be many opportunities to profit. It is not necessary to catch the lowest of the bottoms.

Finally, most leading miners will issue their earnings by Mid of February:

ABX: Feb 14
GG: Feb 11
AEM: Feb 12
NEM: Feb 21
SLW: March 18
KGC: Feb 11
AUY: Feb 18
IAG: Feb 18

IAG has already shown that its costs are sharply up and the stock has been hit.

The earnings will be those of Q4 2012. Compared to Q3 oil is up 5% and gold is down also about 5%. This means that revenues will be comparatively lower and costs will be higher.

Since the start of 2013, gold has not done much and oil price has been increasing. Therefore, on an earning growth perspective, the PM sector offers a negative growth for now.

This might be already priced in, or it might not be. I was expecting a "wash-out" on the base of anticipated poor earnings in general, but the market is already anticipating it, thanks to IAG's pre-announcement.

My plan is to be very cautious on the long side until mid February.




Pascal

[grems8544]

Pascal -- any comment on the strong divergence in AUQ vis-a-vis the relative weakness in the gold sector overall? It's been #1 in the DIVA list for positive divergence for several days.

Regards,

pgd

[Pascal]

Pascal -- any comment on the strong divergence in AUQ vis-a-vis the relative weakness in the gold sector overall? It's been #1 in the DIVA list for positive divergence for several days.

Regards,

pgd

Yes. I noticed that, but it is only a shares buy-back plan from the management.


Pascal

[Pascal]

As you might have noticed, yesterday, we had a positive MF divergence, indicating that the bottom might be close, because investors started buying weakness.



When comparing this move to the past few days, it is however obvious that large buyers are not back in full strength yet.



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.



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.



Note that the Oversold level indicated in the RT system includes a porosity factor.