10/08/08 6:51 pm - GDX: Kangaroo tail confirmed and triple divergence on RSI chart

In the wake of the bailout and interest rate drop, gold has continued to advance higher, now above $900. Gold stocks, however, have fallen in sympathy with the general markets – until today. The HUI, the flagship index of unhedged gold miners, rose by over 18% (!) today, and the GDX, its tradable equivalent, by 14%. In comparison, the S&P500 lost 1% and the Dow Jones lost 2%.

I have been waiting for this event to happen ever since the markets started crashing a few days ago. Adam Hamilton at Zeal has written a good essay on this behavior of gold stocks several months ago. He compared the performance of gold stocks and general stocks during bear markets, and the pattern that emerged was that during the beginning of a long decline of the general stock market, gold stocks would first fall as well, but then turn around and decouple from the general market. First, panic grips investors and they dump everything including gold stocks whose share value is closely coupled to the price of gold. But since gold is THE safe haven asset in recessionary times, gold stocks soon move up again as investors search for anything that provides a positive return. There is potential for some very sharp upmoves of the gold stock sector over the next few months as more and more investors reallocate their portfolios.

The daily chart of GDX below also shows a very bullish technical picture. The RSI has formed a triple divergence (each new low was made at a higher RSI value, meaning the bears are slowly losing momentum) and the last low left a Kangaroo tail behind that was tested the next day but the market rejected new lows and went up sharply today. I’m expecting a move back to resistance at 38 over the next few days, as well as more upside for gold, which could test $1000 soon.

Daily Chart: