I received a couple of questions regarding the previously posted potential bear flag/bearish pennant formation on GDX and figured that they were worth passing along.
Q1: I see the pattern you mentioned in your post. However, can it possibly be an ascending triangle (spanning over the last 10 days) with a target of $26 ? I am new to technical analysis and would appreciate if you could point out the flaw in my view.
A: Yes, GDX could also be in the latter stages of an ascending triangle pattern if one were to use that 24.75 horizontal resistance line as the upper boundary of the pattern. However, ascending triangle patterns are typically bullish continuation patterns meaning that the pattern is formed immediately following a distinct uptrend. I will say, though, that I have seen both ascending & descending triangle patterns (the latter being a bearish continuation pattern) break in the opposite direction and when this happens, it often leads to a pretty powerful move. Maybe that’s because the majority of traders watching the pattern were caught off guard while positioned for a break in the expected direction (continuation of the prior trend).
Q2: Also did you actually mean $23.50 area target instead of $20.50 as mentioned in your post.
A: No. As ugly as that sounds, the measured target for the bearish pennant/flag pattern posted earlier would be around 20.00-20.50. To determine the target on a bearish pennant or bear flag pattern (both similar patterns & both are also continuation patterns) you simply take the distance of the flagpole and subtract it from the top of the last tag of the uppermost trendline. Keep in mind that there’s no need to pull out your calculator. I usually just draw a trendline marking the flagpole, then drag that trendline and place it on the correct point of the flag or pennant. In fact, the chart that I posted earlier & the one below are using log scaling. To get a more accurate pattern projection when using the trendline drap & drop method, arithmetic scaling is more accurate (giving a measure target of 20.00 on GDX right now, assuming that prices don’t move any higher within the pattern). After identifying the measured target of the pattern, I like to align that “rough” target with the nearest horizontal support (or resistance) level and/or any key Fibonacci retracement levels to zero in on my own preferred target (which I have not done yet & only plan to do if & when the pattern breaks to the downside).
One a final note, the reason that I reduced exposure to the mining sector on the gap up today was exactly because of the conflicting or ambiguous technical posture of GDX at this time. If I can’t make a solid case to be long or short a position, then it’s only prudent to book some of all of the profits on that trade. I’d rather give it a couple of days to see how this current consolidation on the mining sector resolves itself and not risk getting caught on the wrong side of a sudden breakout from this trading range.