A Healthy Correction To Set Up The Next Move Higher?

The bull moves that have occurred since the end of 2015 have lasted less than 8 months and were led by parabolic moves in the micro-cap junior explorer stocks. 

In the current move, most of the juniors with sub-$100mm market caps have barely moved. From my perspective, this is an indicator that the move higher in the sector that occurred from late September to the beginning of February was not accompanied by the speculative “froth” that marks the final stage of a bull cycle (for any market-traded asset). As such, I am expecting another large, sustained bull move in the precious sector in the context of the cyclical bull move that began at the end of 2015.

The chart above shows the COMEX continuous contract for gold futures. I’ve highlighted the two corrective pullback periods in the cyclical bull move from 2001 to mid-2011 which show the decline in volume. Volume is known as the “energy” that drives asset prices higher.

Typically, when an asset pulls back or experiences a price correction in the context of a cyclical bull move, a period of high energy volume is followed by a period in which that volume “dries up.” 

In a bull cycle, this “quiet period” is followed by another bull move with rising volume – note the declining volume of gold during the formation of the “handle” in the cup/handle chart formation. We may, therefore, be witnessing the corrective pullback I’ve been looking for.

GDX was up 42% between the end of September 2022 and the close of last year. The sector was getting “frothy” – which is not good in terms of supporting and generating a long-term sustainable bull move. With reference to long-term, I refer to the one from late 2005 to March 2008 and late 2008 to mid-2011. Instead, the gold price has been oscillating between $1600 and $2000, for the most part, during the formation of the cup’s handle. In addition, the handle has formed in conjunction with declining volume.

The daily gold chart (as represented by GLD) shows that the decline in the price since the beginning of February has been accompanied by sharply declining volume.

The RSI and MACD momentum indicators (not shown) have dropped considerably from an “overbought” reading. While the falling volume could indicate that the current pullback is ending, if gold breaches its current price level, it will likely test the 50 DMA (yellow line, $172 for GLD on Feb 9th). If it breaches the 50 DMA to the downside, it’s possible that it could correct down to the 200 DMA (red line, $165 for GLD on Feb 9th). GDX edged below the 50 DMA on February 9th. Historically, pullbacks to the 200 DMA during a cyclical bull move have often preceded monster moves higher.

In my opinion, the market is setting up for a big move higher based on this price/volume action, though there is no way to know ahead of time how much lower the current pullback move will take the sector when the next bull move will begin or for how long it will last.

Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.