In the previous commentary regarding the market situation, I suggested that we might get a very rapid pull-back in the precious metals stocks, ALONG WITH THE TURNAROUND IN THE GENERAL STOCK MARKET. I wrote the following:

“We have the general stock market (SPX) reaching a long-term support level – the low of 770. I therefore expect to see at least a temporary bottom in the SPX somewhere in the 770-810 range. According to my calculations this should correspond to the 125-135 level in the HUI and this is where I plan to buy aggressively. As far as gold is concerned, it should not go lower than $630, and this is also not a ‘must’ in my view”.

As I have not changed my view on the precious metals stocks, I did not send another Market Update so far. I still believe that we are going lower in the immediate and short term, but one of the levels mentioned above was broken yesterday, so here we are.

Yesterday the SPX index closed significantly below the 770 level, so the question is whether this is the exact bottom of the general stock market which would correspond to the bottom in the PM stocks.

I doubt that, because it was not confirmed by analogical price level in the DJIA – 7200. In 2002 SPX bottomed at 770, whereas DJIA dropped to 7200. I expected to see both indices to go back to these levels at the same time, but it did not happen. Instead, we have SPX breaking below this strong support and DJIA closing at 7552 – only 350 above the key support.

Gold is acting quite strongly, taking into account the fact that the U.S. Dollar is climbing to new highs, however that alone is not enough to call a bottom here. It is, indeed, a very positive sign, but there are several important factors that make me think that were going lower in the short term. First of all – USD did not break out decisively above the 88 level – once it does, gold should react. Second, silver does not confirm gold’s strength. Third – gold shares, which tend to lead the metal, are declining.

Did you see intraday spike in gold on Nov 19-th? It corresponded (and was most likely caused by) to the false breakdown of the USD Index. That day it fell almost to the 86 level breaking through the rising trend line, but then quickly reversed and even managed to end the session above 87.5. Usually when such things happen close to the point where the underlying equity / index has to break either up or down, the price will head in the opposite direction.

Why? The false rally is most likely caused by an individual or a company with large amount of capital (usually leveraged) that ‘somehow knows’ where the market is going to go or just knows that many people have stop loss orders below / above a given level. The artificial price swing is created in order to trigger these orders and to make other market participants close their positions. Investors/speculators who used the stop loss orders in this case bet on the correct direction of the price, but what’s the difference, if they will have their positions closed at a loss prior to the rally/decline that they have correctly predicted? If they lose money, then someone else has to win – as this is usually witnessed on the futures market, which is symmetrical.

Who gains? The one, who triggered the false breakout/breakdown, as this entity is able to reopen the position that it has just closed, but at more favorable price. I’m not saying that this is necessarily what happened on Nov 19-th, and I am not accusing anyone of temporary manipulating prices, but I view such an explanation as reasonable and I know that these signs are often a good indication of where the market is heading in the short term.

I still view $630 gold as a possibility, but what I really focus on is gold’s reaction toward USDX above the 90 level. If we get there and the DJIA will touch the 7200 level and reverse I will be quite convinced that it’s safe to open speculative long positions on precious metals stocks. If additionally gold stocks bottom prior to gold itself and it takes place on a very large volume, I will buy really aggressively. The level at which the HUI will be at that moment is not that important. It could be touching its recent lows or be even below the previously mentioned 130 level – if the abovementioned factors are in place, I will consider the bottom to be in.

Please remember that timing the exact bottom is speculation and should be viewed as such. This means using only a small part of ones capital to do it.