Gold Mining Stocks Are Rising From the Ashes

By The Observer

Precious metal stocks are percolating. It turns out all the sector needed was a hold-me-mommy crash in stocks to re-ignite interest. This mornings 4%-plus rip in the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) has spectators taking note. And if technical developments are any indication, then gold stocks have bottomed.

Todays GDX rally is breaking above two resistance zones of note. First is the 50-day moving average and second is the horizontal ceiling at $19.15 that had halted the ETFs prior two rebound attempts. Ahead of todays jump, gold stocks were carving out a potential bottoming formation. The inverted head-and-shoulders pattern revealed a transition of power from bears to bulls.

The series of lower lows that carried the ailing sector into September reversed into a pair of higher lows that ushered GDX to its current perch.

Volume patterns are also improving. I count six accumulation days over the past month compared to only two distribution days. It appears institutions have shifted from net sellers to net buyers.

Turning to momentum indicators provides further evidence that buyers are wresting control of gold mining stocks. The RSI just touched its highest level since April 19 signifying momentum has also transitioned into bull mode.

Throw it all together, and GDX looks healthier than weve seen in many months. Whats more, because the crash in August was so one-sided there is little overhead resistance until the $21 mark. Since the ETF is near $19.50 at the time of this writing, were talking about a good 7.7% of potential upside here.

GDX Risk Reversals

Implied volatility is ramping amid increased demand for options. With upside calls now trading expensive, I like the idea of selling out-of-the-money puts to finance their purchase. Heres one way to acquire bullish exposure.

Sell the Nov $18.50 puts for 33 cents and buy the Nov $20 calls for 52 cents. The net debit to enter is 19 cents, but the cost will be greater due to the margin requirement associated with the naked $18.50 put. Consider taking profits on a move toward $21.

This article provided by NewsEdge.