Gold stock plummeted today (05-24-2016) with the mining ETF (NYSE:GDXJ) plummeting 7.29% to reach $33.56 a share. The 5 day RSI indicator has now reached oversold levels (see below) which should mean we get a bounce in the next few days but it will end up being another failed daily cycle low which will not hold. Why? The slow stochastics on the weekly chart are still way overbought and sentiment has not been reset. Therefore don’t be fooled by the next low gold and mining stocks will print in the near term. The rally out of the low will be convincing but it wont hold. We have to reset sentiment and get to oversold levels again before the next stage of the gold bull can begin. This will not happen for a good number of weeks.
In terms of trading ideas, short term traders should use the beating this sector got today and sell some puts or put spreads in (NYSE:GDX) or (NYSE:GDXJ). Their IV Ranks are both pretty high (around 63 and 70) respectively so these trades should be profitable in the short term. However if the 5 day RSI indicator runs up pretty quickly (by means of a rally), being bullish in this sector at the moment is risky unless you are willing to hold by at least 6 to 8 weeks more. The other short term trade setup would be to sell calls and call spreads out the money when we get a top in the next daily cycle. I believe the next daily cycle will not make new highs and roll over to print a final intermediate bottom sometime in July I think.
With Gold now at $1,226 an ounce and well below its 50 day moving average, we could easily see Gold making its way all the way down to its 200 day moving average of $1,161 before we get a final intermediate bottom. This sector had an unbelievable rally so far in 2016 and before we get the next meaningful move up, sentiment has to reset (see chart). Just have a look at how far we have to come down before we get to ultra pessimism levels – similar to which we had at the last hard intermediate bottom.
Source : Sentimentrader.com
Long term bulls can either hedge long positions or stay long and add to positions if needs be when we hit the next intermediate bottom. Miners had a huge move in 2016 but Silver (NYSE:PSLV) never took off like many had predicted so that could be the place to put your capital to work next time round..