The key event of this week is the breakout in stocks and… It’s complete lack of bullish implications for the precious metals sector.
So, let’s start today’s discussion by checking the big action in the S&P 500.
Stocks broke above 5,000, following the better-than-expected earnings report from Nvidia. The AI-craze got crazier, and people bought even more, deaf to the voices indicating that the Fed might actually need to hike rates instead of cutting them.
Looking at the above chart – does it seem like the Fed did a good job curbing the demand? Nope.
When markets are in parabolic upswings, it’s a tough call to say how high can they soar but it’s quite clear that when the bubble bursts, the decline will be painful to many.
At times like this, it’s great if there’s a part of the market that behaves more predictably, thus increasing the chances of realizing good profits.
Fortunately, we have this sector right in front of our eyes.
Mining stocks are in a very steady downtrend, and after their ratios with gold and with stocks broke below their multi-year support levels, it’s obvious that their medium-term trend is down.
Stock market has been moving relentlessly higher this year.
At the same time, mining stocks have been moving relentlessly lower.
Yes, downswings in stocks boosted miners’ daily declines, but overall miners, have been declining either way.
It’s either a regular decline if stocks rally or a sharp decline if stocks decline. Either way, mining stock prices seem WAY more predictable than the general stock market.
Of course, looking at the stock market chart, it might seem that stocks are very predictable, because they can only go up. Knowing that price bubbles burst paints a huge warning flag on any long positions here – looking at the recent gains should not ensure one that this rally is going to continue for much longer.
There’s simply limited information that we can gain from past experience alone – logic and extra details have to be applied.
In analogy, based on individual experiences, we could tell that it’s the case that only other people die. It seems that we all agree that this is not the case.
- But PR, what about the recent rally in GDX and GDXJ?
Remember when I told you that those were just verifications of the breakdowns below rising support lines?
On Monday, in the Extra Gold Trading Alert, I wrote the following:
There are two resistance lines visible on the above chart – one based on the intraday lows, and the other based on the daily closing prices. The latter are generally more important from the technical point of view.
Now, it is debatable whether the GDXJ invalidated its breakdown below the lower line based on the intraday extremes, but it’s clear that there was no invalidation with regard to the more important line based on the closing prices.
The situation is even clearer in the ETF focused on senior miners: the GDX.
Friday’s close was below both resistance lines – the breakdown was verified.
This, plus miners’ above-mentioned weakness relative to gold suggest that there will be a better buying opportunity shortly – a better one that what we’ve seen last week.
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What happened was normal – we saw a breakdown, then a comeback to the levels that were broken, and now the decline continues. Quite profitably so.
Speaking of profits and quotes from my previous analyses, it was on January 19 when I featured the new approach to making money on declining mining stock prices. In short, I wrote about shorting the JNUG ETF instead of simply buying JDST or shorting GDXJ. Let’s check what has happened since that time.
In short, junior miners declined, and the profits on our short position in them increased, but it’s interesting to compare how all three above-mentioned approaches fared since that time:
- JNUG declined by about 13.9%
- JDST rallied by about 11%
- GDXJ declined by about 6.3%
Just as I had indicated before, shorting JNUG is likely to outperform. I showed that in my own historical trades and you just saw the effects live.
Speaking of the historical trades, I’ll quote what I wrote last month (Jan. 24):
All right, let’s move to the trades that I featured in the Gold Trading Alerts and their results. Since Oct. 8, 2021 there were 9 closed trades in the GDXJ and there’s one open. I’ll include the latter’s “results” based on Jan. 22, 2023 closing prices. They have all been profitable in case of the GDXJ. Most of them has been profitable in case of the JDST, but not all of them. In case of the “NEW approach” all trades would have been profitable as well.
Between Oct. 8, 2021 (the first data point) and Feb. 22, 2024 (the final data point), if one started with $100k, they used that for all trades / positions and re-invested all capital each time (without any margin costs and taxes), those would be the results (I’m using intraday entry/closing prices if they available in the analyses themselves; otherwise I’m using closing prices):
- Gold Trading Alerts - directional trades in GDXJ (buying or shorting it): $211.7k
- Gold Trading Alerts - directional trades in JDST (buying JDST instead of shorting GDXJ) and JNUG (buying JNUG instead of GDXJ): $205.6k
- Gold Trading Alerts - NEW Approach that I described on Friday (shorting JNUG instead of shorting GDXJ and shorting JDST instead of buying GDXJ): $528.0k
The grey line on the below chart shows the effects of buying JNUG for long positions and buying JDST for short positions.
There was a huge gain in 2022, but then there was a also a loss in this case, which was not present in case of a direct short position in the GDXJ (there was a small profit), and there would have been a bigger profit in case of a short position in the JNUG.
Also, here’s the complete list (no cherry-picking) of Gold Trading Alerts, in which I wrote about either opening or closing a trade since Oct. 8, 2021:
- Oct 08, 2021 (opening short position)
- May 12, 2022 (closing short position, opening long position)
- May 26, 2022 (closing long position, opening short position)
- Jul 08, 2022 (closing short position)
- Jul 11, 2022 (opening long position)
- Jul 28, 2022 (closing long position, opening short position)
- Feb 24, 2023 (closing short position, opening long position)
- Mar 01, 2023 (closing long position, opening short position)
- Aug 21, 2023 (closing short position)
- Aug 22, 2023 (opening long position)
- Aug 23, 2023 (closing long position, opening short position)
- Oct 11, 2023 (closing short position)
- Oct 19, 2023 (opening short position)
Since the GDXJ is about to reach our profit-take level/buying opportunity, it might be a good idea to consider using our new approach for the following trade.
Thank you for reading today’s free analysis. The full version of the analysis is not just comprehensive, it also includes detailed near-term profit-take level for our current trading position in junior mining stocks (which I think offers greatest risk to reward opportunity). Subscribe here.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief