This week the Market Vectors Gold Miners ETF (GDX | news | PowerRating | PR Charts ) began
trading on the AMEX. Traders and investors have been waiting many years for this
ETF because it is the first ETF to focus on gold mining stocks. Heretofore,
mutual funds were the only practical way to invest in a basket of gold stocks,
but most will agree that ETFs are better vehicles because they can be traded
intraday, and they can be sold short. I expect that GDX will become very popular
very quickly, while at the same time gold stock mutual funds will lose a lot of
business.
GDX is designed to track the AMEX Gold Miners Index (GDM), the chart of which
looks very similar to the well-known XAU (XAU | news | PowerRating | PR Charts ), but I think the GDM is a
better index because it contains over two-and-a-half times as many stocks as the
XAU and, therefore, has a heavier weighting toward small-cap stocks. This means
that most of the time it can perform stronger with less volatility.
For example, during the rally from the October 2005 low to the May 2006 high GDM
was up 84% compared to only 70% for the XAU, and the GDM pullbacks were less
severe. (Note: Smaller-cap stocks normally perform better in bull markets.)
Even though GDX has only been trading for four days, you will note on the chart
below that we are showing data prior to that time. At DecisionPoint.com it is
our custom, whenever possible, to create historical data for new securities by
adjusting data from the derivative index. In this case it we have used adjusted
GDM data, and we think the chart gives a relatively accurate theoretical picture
of how GDX would have traded. For we technicians this simulated data provides a
context for trading the security without having to wait for live data to
accumulate.
Before I conclude, I should probably make a quick analysis of the chart.
A lot of people think the gold rally is over, and they could be right, but at
this point the chart only shows a short-term correction in the context of a
rising trend. Also, the PMO (Price Momentum Oscillator) has moved back to the
level where two previous corrections found support, and the price index seems to
be forming a small double bottom. The conditions are good for a short rally at
the very least.
It is my opinion that the introduction of the gold ETFs over a year ago had
quite a bit to do with the sharp rally gold experienced during that time. By the
same token, it is also possible that the debut of GDX could attract a lot of
money to gold stocks, causing at least one more run at new highs.
Nothing here should be construed as a recommendation to buy or sell this
security, but I am a big fan of ETFs, and I am delighted that this new product
is available.
Carl Swenlin is a self-taught technical analyst, who has been involved
in market analysis since 1981. A pioneer in the creation of online technical
resources, he is president and founder of
DecisionPoint.com, a premier
technical analysis website specializing in stock market indicators, charting,
and focused research reports. Mr. Swenlin is a member of the
Market Technicians Association.
