Whether or not a divergence at the end of 2011 between the bullion price of gold and the share value of gold mining companies helped signal buyers to begin bidding both higher is a debate for the technicians. But what is clear is that both gold and gold mining stocks have rallied to levels where the temptation to take profits can be great, if not overwhelming in the short-term.
And while nothing here should be construed as an invitation to sell short exchange-traded funds like the Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), both ETFs are very likely to be available at lower levels in the near-term.
GDX and GDXJ have earned “consider avoiding” ratings 2 out of 10 and 1 out of 10, respectively. This comes after the funds have closed higher for six out of the past seven trading days, the last three in technically overbought territory.
Gold mining funds like these were trading with “consider avoiding” ratings just one month ago, shortly after bouncing from their lowest levels of 2011. After nearly two weeks of warning signs from ratings of 3 and 2 out of 10, GDX, for example, fell by 4% over the next six days.
Note that heading into the final trading day of the week, GDX has a short-term, negative edge of more than one and a quarter percent.
Because both funds are trading above their 200-day moving averages, they are less likely to turn out as high probability, short-selling opportunities. For traders who are more determined to take advantage of any weakness in gold mining stocks in the near-term than timing a potential pullback for a long entry, an option like the ProShares UltraShort ETF (NYSE: GLL) gives traders and active investors a way to benefit from exposure to any selling in the group, without having to borrow shares to sell short. Shares of GLL have earned “consider buying” ratings of 9 out of 10 ahead of trading on Friday.
Be sure to read our latest column from 7 Stocks You Need to Know: Trading a Double Shot of Peet’s Coffee and Tea.
David Penn is Editor in Chief of TradingMarkets.com.