MARKET VECTORS GOLD MINERS (GDX)
(7/9/07)

As I discussed in the previous Wave Watch for AEM, we're liking the gold mining sector again, and for our subsequent play, we're recommending the gold miners ETF, (symbol GDX) to get some broader sector exposure.   AEM is one of the holdings in GDX, which has been helping to drive its advance, following the nice breakout we saw last week.

GDX began trading after the May 2006 highs were hit in the XAU and HUI indices, so that any high it makes above 43.34 is for all practical purposes a new all-time high.  Since the wave pattern is generally similar to those for the XAU and HUI, we're using them to guide our expectations for the developing wave pattern in GDX.  On that basis, and since the weight of evidence tends to support an end to the mostly sideways correction from the May 2006 highs, we think GDX should be on track to make new highs.  Consequently, we'd be looking for an initial test of the 43.34 area, and if successfully violated, then some preliminary new highs at 45.16 and 47.49.  

A couple of caveats to note.  While I think the bullish wave count, as illustrated in the chart, is most probable, we can't rule out the possibility of an ABC pattern from March, of which this advance would be Wave C.  If that turned out to be the case, then probably 43.34 would be about it.  As long as any pullbacks that develop are corrective, though, then it would support the likelihood that resistance encountered at this level would eventually be violated.  Also, if the new rally that broke out in late June is the first wave within a Wave 3 advance, some pullback should be expected, but it should also be temporary.  38.07 is support for at least the conclusion of a first wave pattern, with key support for the trade at 36.64.  We like the stock while it remains above this level, and are comfortable establishing a position even if some pullback is seen.  However, we'd stop out if the stock breaks key support.

Options for GDX are pricing right on the model, regardless of how in or out of the money you want to trade.  If you want to save a few dollars, you can consider the December 2007 $43 Call (symbol GDXLQ), which was selling for $2.90 with a good Delta at 0.46.  

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