Friday, March 28, 2014

Check out the capitulation in distribution of GDX shares.

I'm constantly looking for more information that will help me gauge whether or not the bottom or top is in for this market or that.  Today I want to share my findings on the Marc Chaikin Accumulation Distribution (AC) line analysis for GDX, the gold miners ETF.

First, here is the background on the AC line.  The important part of that link is:


Interpretation

The Accumulation Distribution Line is a cumulative measure of each period's volume flow, or money flow. A high positive multiplier combined with high volume shows strong buying pressure that pushes the indicator higher. Conversely, a low negative number combined with high volume reflects strong selling pressure that pushes the indicator lower. Money Flow Volume accumulates to form a line that either confirms or contradicts the underlying price trend. In this regard, the indicator is used to either reinforce the underlying trend or cast doubts on its sustainability. An uptrend in prices with a downtrend in the Accumulation Distribution Line suggests underlying selling pressure (distribution) that could foreshadow a bearish reversal on the price chart. A downtrend in prices with an uptrend in the Accumulation Distribution Line indicate underlying buying pressure (accumulation) that could foreshadow a bullish reversal in prices.

OK, with all of that background, now look at the AC chart vs GDX.  All I can say is holy cow!  That selling pressure was ridiculous!!  The selling into the GDX December low of about $20 was more than 4x the peak positive AC reading over the past 8 years!  If that is not the face of capitulation then I don't know what is.  It is classic capitulation folks.  All the weak hands got flushed.  More importantly, all of this selling did not result in a lower low for the share price!!  It resulted an inclining double bottom of the Sept 2008 low.   That is potentially very bullish.  As soon as metals prices pick up again the miners, who have cut out all their dead weight and are running very lean, very efficient operations right now, will see their profits begin to sky rocket.



Additionally look at the action since the Dec. low.  The move into wave red 1 could be interpreted as 5 waves up without too much of a stretch.  The retracement back down takes more imagination to get 5-3-5 out of it (a-b-c) but I do think I can make a fair and valid case of it as shown below into red 2.  Perhaps it is just a coincidence that that a-b-c bottomed, so far at least, at a few pennies from the 68.2% fib.

If my count is correct, expect a rocket ride for miners and metals to begin very, very soon (as if the ride from $19.60 to $28 on GDX in the course of about 2.3 months wasn't already a massive gain).  If my model is correct, look for $35 on GDX no later than the end of July and possible a good deal earlier.


 Probably the most leveraged way to play this short of using options is with USLV.  The problem with options is that they do not allow low cost strategy exit based on trigger points.  But they will provide max leverage if you want to gamble with a smaller amount of expendable cash.  Just keep in mind that ANY money in these markets is gambling, period.

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