About one month ago, the gold sector sold off to what I believe marked an exhaustive low.

After several weeks of declining, the VanEck Vectors Gold Miners Fund (GDX) had dropped to just $17.50 per share. It was trading almost 20% below its 50-day moving average (MA) line – an extreme move, even for the volatile gold sector.

And with the commercial trader net short position dropping to just 2,000 futures contracts (its smallest short position ever), we had a pretty good setup for calling a bottom in the gold stocks.

Gold stocks then put on a blistering rally. GDX gained almost 10% in about one week. But, as is often the case when an oversold sector makes its first bounce off of the bottom, GDX ran into resistance. 

Before we could declare a “real” bottom was in place, GDX would have to come back down and form a higher low on the chart.

That appears to be what happened last week. Take a look at this GDX chart…

The chart now has a higher low in place. That’s bullish, of course, since it supports the idea of the September low marking an important intermediate-term bottom for the sector.

More impressive, though, is this chart now appears to be forming an inverse head and shoulders pattern. This is a reversal pattern that typically plays out as a stock moves from a bear trend to a bull trend. If GDX can close decisively above the neckline of the pattern, and above its 50-day MA (at about $19.30), then we could see a sharp, continued move higher.

In that case, the potential target measures to $20.50 per share over the next two to three weeks. By then, if this move plays out,  the 9-day exponential moving average (EMA) will have likely crossed above the 50-day MA – which shifts the intermediate-term trend to bullish. And then we can start talking about longer-term price targets.

For now, though, I like the potential of this chart pattern to produce a decent rally over the next two weeks or so.

Best regards and good trading,

Jeff Clark

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