While most stocks have been sold aggressively during the last few weeks (the S&P 500 is down 7.15% in December) the gold mining sector as measured by the GDX is enjoying its best month of 2018 with a 10.5% gain month-to-date. If we look at the chart of the GDX/SPY ratio for the last couple of years we can quickly deduce that an important low was put in place in September and that a reversal of the longer term trend may be underway:
GDX/SPY (Daily - Two Years)
If we zoom in a little bit closer we can see the significance of the most recent breakaway gap which occurred Monday morning:
As Tom Bruni explained in a recent blog post on gaps, breakaway gaps are highly significant because they generally do NOT get filled in:
"A breakaway gap occurs when prices are breaking out of a range on significant volume, developing a new trend. As a result of a new trend bringing in new market participants and catching many off-sides, this gap generally does not fill and sees upside follow-through relatively quickly."
If these recent gaps in the GDX/SPY ratio are indeed breakaway gaps it would mean that the GDX is in a new uptrend relative to the SPY and there is still plenty of upside ahead in this ratio. At its 2016 peak the GDX/SPY ratio was around .15 (the ratio is currently .082), and at its 2011 peak the ratio was above .60. While a retracement to 2011 levels may be several years off, I believe the .15 level in the GDX/SPY ratio can be achieved during the first half of 2019. While the ratio can reach the .15 level through a multitude of variations in the price of the GDX and SPY, I believe the most likely scenarios involve a 50%+ rise in the GDX.
I believe this is an important development that bears watching over the coming weeks. Relative Strength (at top of chart above) is confirming the GDX breakout and there are strong signs of accumulation across the gold mining sector in recent weeks.
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