GDX/GDXJ Update

I have an options model portfolio trade in GDXJ May $21.63 (odd strike?) calls, I have a 30% gain this morning in them and it seems many of you have entered the same trade as I have received a lot of emails about it this morning.

This is a tough one to call, I'll just remind everyone the same thing I've said in a few emails about it this morning, "Bears make money, bulls make money, pig get slaughtered". At the same time, I don't want to leave reasonably potential profit on the table. You'll see the issue in the update below, but before that let me mention a compromise you may want to consider if your position size makes it feasible, you could take your original investment of the call cost off the table and let the profits run or take some percentage of partial profits. We just don't want to see a winner turn in to a loser and any significant pullback could start to effect gains via the call's time decay.

 This 5 day chart of GDX (GDXJ is similar just with less history) is why I'm not bullish on these too for anything more than a volatility bounce.

 GDX daily, the major support of the trendline shown above was broken, then a descending triangle formed which is considered by TA to be a bearish consolidation/continuation pattern. When we see these after important support is broken, it's almost a given there will be manipulation of the pattern with a head fake bounce higher to shakeout the shorts that entered on the break of major support and upon seeing the bearish continuation consolidation. Just looking at the price chart alone and thinking in terms of market psychology, it wouldn't make much sense to bounce the miners unless it served a purpose, that would be to shakeout the shorts. Based on that alone, a move in GDX (I favor GDXJ and that's where my position is) would have to break above the apex of the descending triangle which it pretty much has today, a better move would be a move to the $47 area so the triangle looks like a failed price pattern, but ultimately to shakeout the most shorts, a move above the long term trend line in the $50 area would be the ideal target. At the red arrow we see a bullish Hammer candlestick which implies a reversal (no target for the reversal is indicated with a hammer, just that lower prices were rejected and short term support was established). At the white arrows we have a confirmed reversal on rising volume, so far so good.

 The GDXJ daily chart is similar, but with the descending triangle above long term support, it has the same implication though and long term support was broken. Again there's a bullish Hammer reversal candlestick at the red arrow and a confirmation of the hammer at the white arrow on rising volume. The rising volume is likely to a large degree, shorts stopping out on a failed test of resistance and today we are just above former support, turned resistance and now back to support.

 Here's where the trades get tricky, surprisingly the long term 60 min and 30 min charts in GDX and to a greater degree in GDXJ, show pretty serious looking leading positive divergences. The approximate accumulation area is in the green box so for the trade to be worthwhile, prices should move above the accumulation area before any strong distribution of the head fake move start appearing.

 It's the very near term on the short end like this 2 min chart that show some non-confirmation, this suggests at least a pullback.

 The 5 min positive divergence that prepped the miners for a move higher (this is likely market maker or in this case Specialist accumulation as they know what the bigger picture is a they likely filled the order that created the  30-60 min positive divergences. It use to be  that about 30% of a stock's daily trading volume was attributed to market makers/specialists trading their own account. That percentage may be lower with High Frequency traders front running the traditional middle men and acting as the source of liquidity, although they are not regulated by the same laws that the middle men are (for example, they are under no obligation to provide liquidity at market orders, so when the market goes south, the HFTs simply shut down their liquidity operations. The HfT's are primarily in the business of predatory trading against Wall Street itself and much of that is focussed on front running market makers and specialists in order to generate order flow and cash in on volume rebates. In any case, there's a relative negative divergence here too, so the probability of a consolidation or a pullback is growing, with limited time to the expiration and time decay working against us, these corrections are not helpful in an options trade.

 GDXJ 15 min is about in line and looking pretty good, it's the shorter chart and pullback that concern me and there is the dilemma, take profits before time decay starts picking up or hold and look for the bigger move that the 30/60 minute charts are indicating?

 GDXJ is right above support so this is an ideal area for a consolidation. RSI does look constructive here.

Using an hourly version of my X-over screen, we have a short term confirmed long signal. The first pullback is usually to the rising 10 bar (60 min chart) moving average. GDXJ is already consolidating in a triangle since 10:15 so the consolidation part was correct. For now, I'm going to ride this position out and keep a close eye on price relative to the 60 min 10-bar moving average.