ETF in Focus: GDX

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau, technical trading associate at ETF Digest

NEW YORK (ETF Digest) -- Here is a look at the Gold Miners ETF (GDX) on a weekly chart. Back in 2009, GDX was in a phase of vertical development looking at it from an auction market perspective that I labeled with the rising channel on the chart.

In early 2011, GDX was forming a continuation pattern known as an Ascending Triangle. An Ascending triangle is when the market has been following an uptrend but has encountered a resistance level. It signifies a supply of shares being distributed at a certain price forming the horizontal resistance level. When that supply has been absorbed by the increasing demand, indicated by the rising lower boundary line, the pressure is off and the trend typically continues on the breakout as there is no further near-term supply over head.

Initial profit-taking sometimes causes a pullback to the prior resistance area, which now becomes new support, and becomes another favorable low-risk buying opportunity. Those who were stuck short look to get out break-even, and those who missed the breakout are looking to get long and buy. What the next catalyst may be that increases the supply to meet this demand is anyone's guess. Successful traders hold their winners until there is a clear reason to sell. Taking profits for the sole reason of not losing them is one reason why many traders lose money over the long run.

Looking at this year's price action, since the breakout from the Ascending Triangle, GDX has entered a phase of horizontal development. Horizontal development is a consolidation area, or sideways movement, where the market appears to have found current value. Any short-term strategy to trade inside a balance area is likely to encounter randomness and is, in my opinion, high risk. I believe the low-risk trades are found at the extremes of the balance area, either fading these areas or waiting for the breakout. I have marked this balance area on the chart with a rectangle.

There was some negative divergence in the Moving Average Convergence Divergence (MACD) as the balance area high was tested recently. Rectangles or Balance Areas can be either continuation patterns or reversal patterns. I would prefer to take the initiative trade on a breakout from a rectangle with the direction of the prior trend, as that is the path of least resistance. However, another trade that often gives good reward to risk ratios is to take the responsive trade, which is to fade one extreme of the balance area and target the other side.