Junior is About to Rise Up – in the Mine

• Posted by Greg Harmon
• on April 7th, 2011

Gold has been flying and the mining stocks are now catching up. But within the Gold Miners there is a more interesting story unfolding and a possible trade opportunity. Below is a ratio chart of the Market Vectors Junior Gold Miners (ticker:$GDXJ) vs the Market Vectors Gold Miners (ticker:$GDX). This ratio has been in a consolidation phase between 0.61 and 0.68 since November, meaning that the two ETF’s have alternated turns leading higher but both ETF’s have been generally moving together. This ratio is now at the top of the range again and may be ready to break higher.

Notice that the Relative Strength Index (RSI) is rising and the Moving Average Convergence Divergence (MACD) indicator. It is also at the top of the Bollinger bands which are starting to flare out. These are signals of a potential move higher. But it has been there before. What puts this over the top as a break out trade opportunity comes from also looking at the chart for Gold below. Gold made a big run from 1150 to 1350 from the end of July through to the beginning of November and then has been consolidating in a broad range until recently breaking higher.

But look at how this compares to the GDXJ vs GDX ratio during that time. During the run higher the Junior Miners, GDXJ, strongly outpaced the Miners, GDX. The ratio settled into a range as Gold consolidated. So with technicals set up to support a move higher and Gold running look for a break out above the channel that the ratio has been trading in.

The Trade

There are 3 ways to play this move.

1. Buy the GDXJ and sell the GDX at the ratio of 0.68 (250 shares of GDXJ for every 170 shares of GDX).

2. Since both GDXJ and GDX have been rising, just buy GDXJ as the ratio suggests it will rise faster.

3. Buy the components of the GDXJ. The 3 biggest names in the GDXJ are Allied Nevada Gold (ticker:$ANV), Coeur D’Alene Mines (ticker:$CDE) and Hecla Mining (ticker:$HL) and all are biased to the upside.

Trade’m well.

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