Home Gold Stocks Gold-Stock Seasonal Plunge – Adam Hamilton (09/28/2020)

Gold-Stock Seasonal Plunge – Adam Hamilton (09/28/2020)

The gold miners’ stocks have just been hammered, plunging to new correction lows.  That shattered their indexes’ 50-day moving averages, pounding nails in the coffin of this sector’s recent high consolidation.  This necessary correction probably isn’t over yet.  It is still small and short compared to this bull market’s precedent, the gold stocks are nowhere near oversold, and they are heading into a seasonal-plunge month.

Seeing the gold stocks rolling over into a correction shouldn’t surprise anyone.  They enjoyed a great run, as evident in their leading and dominant sector benchmark the GDX VanEck Vectors Gold Miners ETF.  From mid-March’s pandemic stock-panic lows to early August, GDX rocketed 134.1% higher in just 4.8 months!  That powerful and fast upleg left gold stocks seriously overbought, necessitating a correction.

That healthy process to rebalance stretched technicals and greedy sentiment began right away.  In the first four trading days after GDX peaked at $44.48 in early August, this ETF plunged 12.2%.  The major gold stocks of GDX mirror and amplify gold, which overwhelmingly drives their earnings.  So the gold-stock selling ceased with gold’s own sharp selloff.  Gold had shot parabolic to extraordinarily-overbought levels.

But gold’s nascent correction quickly lost momentum, so this metal started drifting sideways in a high consolidation.  The gold stocks followed, with GDX meandering between about $40 to $43 for over 5 weeks beginning in mid-August.  That truncated gold-stock correction morphing into a much-less-painful high consolidation bred much complacency.  Traders mostly assumed the gold-stock selloff had already passed.

That was premature and risky, as I wrote in an essay a few weeks ago arguing that gold stocks were still in correction mode.  My contrarian conclusion then was “…with gold stocks remaining very overbought technically, and greed still elevated after an insufficient selloff, a resurgent correction is likely.  That could easily extend to 25% in GDX, another 20% lower from this week’s levels.”  That has started to come to pass.

GDX plunged sharply this week, falling 3.7% Monday and another 6.3% Wednesday!  That first drop just shattered this leading gold-stock benchmark’s 50-day moving average, which is the highest-probability support zone for high consolidations.  Once 50dmas decisively fail, selling tends to compound as technical damage mounts.  The next stop after 50dmas is 200dmas, and GDX’s was way down at $33.15 this week.

Revisiting GDX’s 200dma today would make for a 25% gold-stock correction, much more in line with bull-to-date precedent.  That seems probable given the technical situation in gold.  In last week’s essay I dug into gold’s overboughtness risk.  The gold stocks will keep correcting as long as gold does, with GDX very likely to leverage gold’s downside by 2x to 3x like usual.  The fat lady has yet to sing on gold’s own selloff.

Neither gold nor its miners’ stocks are likely to decisively bottom, paving the way for their next big uplegs, until their recent overboughtness is worked off.  That can be measured by comparing GDX’s daily closes with their underlying 200dma.  Dividing the former by the latter yields a construct I call the Relative GDX, or rGDX for short.  Considering gold-stock price levels relative to their 200dmas yields great timing insights.

This Relativity Trading system I developed well over a decade ago shows that relative multiples like this rGDX often form horizontal ranges over time.  Gold-stock uplegs within ongoing bull markets tend to peak at similar levels relative to GDX’s 200dma.  And the subsequent rebalancing corrections also tend to bounce at similar rGDX levels.  Gold stocks can be very profitably traded within this Relativity trend channel.

These Relativity trading ranges are defined based off the past 5 calendar years of data. That yields rGDX major support and resistance at 0.85x and 1.50x. In other words, during this gold-stock bull this sector’s leading benchmark mostly traveled within 85% to 150% of its 200-day moving average. The former is the time to buy relatively low before a major upleg, while the latter is the time to sell relatively high as it peaks.

This latest massive post-stock-panic upleg was born at radically-oversold levels way down at 0.694x GDX’s 200dma! Because of that anomalously-extreme oversoldness, we backed up the truck to heavily deploy in fundamentally-superior gold and silver miners in the aftermath of that rare stock panic. These specific trades filled our subscription newsletters, recommended to the people who keep us in business.

I publicly wrote about the coming incredible gold-stock opportunities in that post-panic upleg in March and April. On March 20th in an essay on mid-tier gold miners’ latest quarterly results, I concluded gold stocks had “epic potential to mean revert radically higher as fear fades and gold recovers, yielding huge gains to early contrarians.” GDX was still trading at $20.55 the day that essay was published, not far off its panic lows.

On April 3rd I analyzed gold stocks’ crash and V-bounce in another essay. With GDX still trading under $25, I wrote “All this argues that a major new gold-stock upleg is getting underway, portending big gains coming! Gold supports this outlook too.” Those radically-oversold stock-panic rGDX lows were a key reason gold stocks’ prospects were so darned bullish then. Indeed GDX rocketed 134.1% higher over 4.8 months.

Our dozens of gold-stock positions soared to huge unrealized gains. As long as gold stocks didn’t grow too overbought, we could keep riding their powerful upleg higher with loose trailing stop losses. But starting in late July, GDX’s overboughtness was mounting. The rGDX surged as high as 1.454x then, indicating that gold stocks had run too far too fast to be sustainable. That was challenging 1.50x upper resistance.

Gold stocks’ own levels relative to their 200-day moving averages aren’t the only consideration for gaming toppings after major uplegs. Gold itself, which is again this sector’s dominant primary driver, was hitting far-more-extreme overboughtness levels per its own Relativity metric. And when gold inevitably turned south, so would its miners’ stocks. So we prudently took precautions to lock in more of our massive gains.

When a Relativity trading indicator nears extremely-overbought upper resistance, it is time to ratchet up trailing-stop-loss percentages. Early in new gold-stock uplegs following corrections, we don’t want to get whipsawed out of young trades prematurely before those uplegs near harvest. So looser stop losses are wise. Given the wild volatility inherent in this small contrarian sector, I generally start with 25% trailing stops.

It takes rare serious-selloff circumstances to trip those, they are kind of like catastrophe insurance. But as uplegs mature and gains mount, those stop-loss percentages are tightened as the rGDX marches ever higher. This time around I started ratcheting up our trailing stops in late July as the rGDX shot over 1.35x. If gold stocks are moving normally, those stops are tightened in 5% increments like from 25% to 20% to 15%.

Some uplegs give enough time to ratchet all the way to 5% trailing, but this latest one was moving fast with gold shooting parabolic. So we were able to get to 10% near the end of July, locking in more of our fat unrealized gains. When gold and thus gold stocks started rolling over, the vast majority of those were automatically mechanically cashed out as realized gains. This discipline helps maximize upleg winnings.

Practically, it is impossible to precisely call correction bottomings and upleg toppings in real-time. Buying relatively low is done when fear reigns and it feels miserable to redeploy in a bombed-out sector. But later selling relatively high is much more challenging since greed and euphoria can carry uplegs deeper into extreme overboughtness before they fail and give up their ghosts. That makes selling outright a gamble.

But ratcheting up trailing stops allows gold-stock traders to stay deployed as long as possible when this sector’s uplegs are peaking. No sell decisions are necessary, as these mechanical stops maximize the potential realized gains. We don’t need to exit until selloffs force our hands. Today’s gold-stock correction was definitely predictable and anticipated, as serious overboughtness per the rGDX always portends selloffs.

Major gold-stock corrections are inevitable after major gold-stock uplegs. Bull markets are an alternating series of uplegs followed by corrections. While it is foolish to stay long gold stocks in the latter absorbing serious losses, there are definitely ways to trade corrections. With all our huge upleg gains realized and safe in cash, I recommended a couple other types of trades to our newsletter subscribers to game that selloff.

They included leveraged inverse-gold-stock ETFs and gold-stock-ETF put options. These enjoy gains proportional to gold-stock losses during bull-market corrections. We still have these bearish gold-stock trades on our books, as this gold-stock correction likely isn’t over yet. That again becomes apparent first in prevailing rGDX levels. As of the middle of this week, that technical metric had only retreated to 1.135x.

While that isn’t seriously-overbought any more, again the rGDX trading range now runs between 0.85x to 1.50x. It is a long way down yet from 1.135x GDX’s 200dma to 0.85x! Today’s correction is the fourth of this gold-stock bull. The first three bottomed at far-lower rGDX levels averaging just 0.754x! Odds are today’s correction won’t plunge so deeply, as all those earlier ones had unique circumstances intensifying them.

But it is hard to imagine the gold stocks not at least returning to GDX’s 200dma after blasting higher in their second-biggest upleg of this bull. Again that would make for a 25.5% GDX correction this week, but GDX’s 200dma continues to gradually rise. Relativity charts effectively collapse 200dmas horizontal to 1.00x, and render all the price action meandering around them in perfectly-comparable percentage terms.

GDX is likely to keep selling off on balance until the rGDX returns to 1.00x. Bull-to-date precedent argues for a bigger gold-stock correction too. This bull’s first three corrections averaged hefty 36.5% GDX losses over 8.0 months each! As of the middle of this week, GDX’s current correction was merely 15.4% in just 1.6 months. That still seems much too small and short to effectively rebalance away greedy sentiment.

Another factor is coming into play which could accelerate gold-stock downside over the next month or so, seasonality. The gold stocks are on the verge of their biggest seasonal selloff of the year, which runs from late September to late October on average. This next chart is borrowed from my last essay on gold-stock seasonality from late July. It distills out gold-stock performance through modern bull-market years.

In gold those include 2001 to 2012, which was followed by a bear, and then 2016 to 2019. 2020 isn’t yet factored in since it remained a work in progress. The older HUI gold-stock index, which closely mirrors GDX since they include most of the same major gold miners, has to be used instead of GDX. Born in May 2006, GDX’s history is insufficient for long-term seasonal analysis. But it is interchangeable with the HUI.

All these gold-bull years’ price action is individually indexed off the previous year’s final close, which is recast at 100. That keeps gold-stock-price moves comparable in constant-percentage terms regardless of prevailing price levels. Then all these annual indexes are averaged together to reveal this sector’s seasonal tendencies. Now right as GDX is correcting, we are staring into this sector’s biggest seasonal selloff.

The gold stocks tend to suffer a sharp seasonal plunge from late September to late October, between their powerful autumn and winter seasonal rallies.  The major gold stocks per the HUI tend to peak on September’s 14th trading day, which mapped to September 21st this year.  Then they average a 6.6% retreat into October’s 19th trading day, which happens to be October 27th in 2020.  That is a tough month.

While 6.6% may not sound like much, that dwarfs the HUI’s other two seasonal corrections averaging just 2.7% and 2.8% declines.  And the averaging inherent in seasonality analysis really smoothes out the big drops.  Seasonals prove strongest when they act as tailwinds for prevailing trends driven by technicals and sentiment.  And the major gold stocks are certainly in correction mode entering this seasonal plunge.

So the overdue gold-stock selloff necessary to eradicate the serious overboughtness and widespread greed as this sector’s last major upleg peaked could very well largely run its course over the next month or so.  The seasonal downside tailwinds could bring this correction to a head sooner than it otherwise might have played out.  GDX will likely have to correct at least 25% before its next upleg can start marching.

If we get lucky with a mere 25% correction after such an enormous gold-stock upleg, that would make for another 10% or so lower during this coming seasonally-weak month.  That is roughly in line with this bull’s precedent.  The biggest wildcard is what happens in gold, which shares this sharp seasonal plunge from late September to late October.  I discussed that front in last week’s essay on gold’s overboughtness risk.

As of the middle of this week, gold’s own correction deepened to 9.8% since its last upleg shot parabolic climaxing in early August.  Again the major gold stocks of GDX tend to amplify material gold moves by 2x to 3x, implying a correction of 20% to 30% on a 10% gold one.  But ominously gold still remained 8.5% above its 200dma this Wednesday!  That key baseline is currently way down at $1714, still far lower from here.

A 200dma approach for gold’s correction would extend it to a serious 16.9% today!  But with that 200dma constantly rising, a better estimate for a month from now might be 15%.  If GDX leverages that kind of gold selloff by 2x to 3x, that implies a more-dire correction of 30% to 45%.  30% total is certainly possible in this seasonal plunge, but 45% is excessive.  Remember this bull’s prior GDX corrections averaged 36.5%.

A 30% GDX correction would bash the major gold stocks back down to $31.14.  If that comes to pass, so far the gold stocks have only seen half their correction.  Odds are GDX will decisively bottom somewhere around 25% to 30% below early August’s major upleg peak.  While painful for those trapped in it, this is really exciting as corrections yield the best buy-relatively-low opportunities seen within ongoing bull markets!

All bull markets naturally flow then ebb, taking two steps forward before retreating one step back.  Their price action gradually meanders around uptrends.  This normal upleg-correction pattern keeps sentiment balanced, extending bull markets’ longevity.  And it is a huge boon for traders, offering excellent mid-bull opportunities to buy relatively low before later selling relatively high.  That greatly expands bulls’ potential gains!

So I’m eagerly awaiting this correction’s bottoming to aggressively redeploy in fundamentally-superior gold and silver stocks at lower prices before their next major upleg gets underway.  I’ll use this excellent rGDX indicator in concert with others to decide when high-probability-for-success buying opportunities are returning.  Actively trading gold and gold-stock bulls requires study and discipline, but multiplies your wealth fast.

At Zeal we started aggressively buying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows.  We layered into dozens of new positions before gold stocks grew too overbought, which were stopped out recently at huge realized gains running as high as +199%!  Our subscribers multiplied their wealth within months.

To profitably trade high-potential gold stocks, you need to stay informed about their technicals, sentiment, and fundamentals.  And what is moving gold, their dominant primary driver.  Our popular newsletters are a great way.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantage of our 20%-off sale!  Corrections are the time to do your gold-stock homework, preparing to redeploy as they pass.

The bottom line is gold stocks are still correcting after soaring to seriously-overbought levels when their last upleg peaked in early August.  The deceiving high consolidation after that failed decisively this week when GDX shattered its 50dma, proving this sector’s correction is alive and well.  Only about 15% so far, it is likely to extend to 25% to 30% before overbought technicals are worked off and sentiment is rebalanced.

Seasonality is likely to exacerbate this necessary selling over the coming month, which is gold stocks’ biggest seasonal plunge of the year.  These tailwinds pushing this sector lower in concert with normal correction dynamics could accelerate this selloff into finishing its vital mission sooner.  That will be the time to aggressively redeploy in beaten-down gold stocks, buying great miners at relatively-low prices.