DataTrader: Market Vectors Gold Miners ETF Makes Its Move
Is it time to take profits in GDX?
There has been a lot to like about the Market Vectors Gold Miners ETF (GDX). Since its last oversold close on October 20th, shares of GDX have gained more than 16% over 10 days. Heading into trading on Friday, the ETF is at its highest level since the middle of September. For traders and investors anxious about the prospects for stocks and fearing a bubble in bonds, gold and gold mining-based exchange-traded funds often have proved to be a welcome alternative.
But as GDX gains, the likelihood of a short term reversal grows. As of Thursday’s close, shares of the GDX have finished in overbought territory for the past two days in a row and are now trading at a new, short term high. Historically, focusing on the short term, this kind of market behavior has tended to anticipate a reversal and a move lower as traders and investors lock in recent gains or simply begin to trim positions as they become more profitable.
And while these reversals sometimes result in large sell-offs, the key point to keep in mind is that for traders looking to buy into these markets, it is often better to wait until they have sold off before climbing on board. There are few things more frustrating for a short term trader than to buy an ETF on a breakout, such as GDX has just accomplished, only to find that breakout met with aggressive selling. One of the best ways to avoid that scenario is simply to wait until the ETF pulls back first, before taking your long position.
Note for example that the last time GDX was trading at similar levels was just a week ago, during a six-day winning streak that took the ETF deeply into overbought territory. Immediately afterward, GDX sold off – losing more than 5% before trimming losses on the second day of declines.
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David Penn is Editor in Chief of TradingMarkets.com