Wednesday, June 24, 2009

GDX Continues to Lead

Top Line: Stocks failed to generate much in the way of buying this week with the Dow dropping for the fourth day in a row. The position in the market should provide further downside over the next couple of weeks.

[Next post should be Sunday evening.]

The stock market was hoping for good news from the Fed (???) on Wednesday but the Merry men at the Fed didn't deliver much in the way of good buying news. After their announcement, the market struggled to hold its gains. Boeing (BA) was down 5% which kept the Dow from staying positive but the other major indexes did manage to hold gains going into the close.

GDX is the major news of the week. After trading just above 45 early in the month, GDX broke below 36 both Monday and Tuesday this week for a great buying opportunity. We bought some, did you? On Tuesday morning, a gold mining analyst turned bearish on the sector and GDX put in a low around 35.50 before starting a two day run that has taken it back up into the 38's. Apparently, this analyst has Not been reading the Update. We have been suggesting buying GDX under 38 for the past couple of weeks.

If you take a look at a chart of GDX (use BigCharts.com in our links to the left), you will see a steady pattern of lower highs and lower lows since early in June...until today. Today, GDX broke out of that trend but is it a true breakout? Normally, we would like to see a little more volume to confirm the breakout but we didn't get it. This could mean there may be more buying opportunities in the near future.

We still think that today's move in GDX may not allow for a new low for the move because GDX should bottom before the broader market. Tuesday's low near 35.50 may be the low of the move which is about 20% off the 45 high earlier in the month. This 20% down move has given us a clear picture for what the stock market wants to do. We don't think that the stock market will manage to drop 20% from its highs...GDX is much more volatile than the broader market so we expect the market to only drop about 10%. Using our SP500 estimate of 850 from a high of around 955 gives about a 11% estimate.

Taking the comparison one more step, we want to look at the time from the GDX high to yesterday's possible low. That was 16 trading days from June 1st to the 23rd. So, if we go to the SP500 high back on June 11th, today was the 9th trading day since then. That would put us at a low on a projected July 2nd, just the perfect day for a low in our opinion as that is the date of the employment report. Of course, this all speculation, and the way it all plays out Will be different; but, we will be here to pinpoint the low as best we can.

A late addition: We want to emphasize that the end of the quarter could bring some strength to the market over the next few days but we still think the market needs to head down one more time before it can go on a solid run. Nothing is certain, but probabilities are high. Check out the True Contrarian in our links. He has a new post.

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