A Big Support Break For GDX

08/06/08 08:48:17 AM

by Arthur Hill

After forming a massive head & shoulders pattern, the Gold Miners ETF broke support to confirm the reversal and establish a long-term downtrend.

Security: GDX
Position: Sell

On the weekly chart (Figure 1), the head & shoulders pattern for the Gold Miners exchange traded fund (ETF) (GDX) extends from October 2007 to July 2008. This 10-month period represents a massive distribution in which the bearish reversal pattern evolved. After forming the head high, GDX formed a lower high to trace out the right shoulder. This lower high showed less buying pressure, and the subsequent support break forged a lower low to reverse the uptrend. GDX now has a lower high in March and a lower low in August for a new downtrend.

FIGURE 1: GDX, WEEKLY. The head & shoulders pattern seen here extends from October 2007 to July 2008.

Graphic provided by: TeleChart2007.

High volume confirms the support break and pattern. The surge that formed the head occurred with high upside volume. However, upside volume was not strong when the ETF advanced to form the right shoulder. In addition, downside volume expanded as the ETF broke neckline support with two sharp declines. Selling pressure is clearly expanding and the move below support broke the bull's back. The next support zone resides around 32–33 and this is the downside target.

FIGURE 2: GDX, DAILY. Here, GDX broke the April–June lows with a sharp decline on high volume.

Graphic provided by: TeleChart2007.

On the daily chart (Figure 2), GDX broke the April–June lows with a sharp decline on high volume. Note how volume rose as the ETF declined. Broken supports around 42–45 turn into resistance and there could be a throwback rally if the ETF becomes oversold. A move back into this zone could also provide a second chance for new short positions.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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HEAD & SHOULDERS

A Big Support Break For GDX

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