This essay is based on the Premium Update posted October 30th, 2009. Visit our archives for more gold articles.
The precious metals market is correcting, as I mentioned it in the previous essay, when I summarized that it seems that gold, silver, and corresponding equities need to take a breather to correct their post-$1,000-breakout rally. This is what we've seen lately, so the question is how low can we go and what to look for as signs of a reversal.
Before I proceed with providing you with my thoughts on that matter, I would like to let you know about the new free feature that I've added to my website this week. The newly introduced Free Charts (276 of them, featuring individual gold and silver stocks) allow you to see my view on each gold/silver stock's exposure and leverage to metals, along with an easy-to-use interpretation of the statistical coefficients.
Speaking of precious metals stocks - they have been hit particularly strong in the past several days, so this week I would like to cover the situation in this important sector.
The mining stocks sold of heavily in the past two weeks but have now reached a significant support levels and the technical situation is now once again favorable. The GDX ETF (proxy for PM stocks) has just reached the 50% Fibonacci retracement level and bounced with a vengeance, which by itself makes it probable that the bottom is already in. GDX closed at $43.80 on Thursday, right at one of the support/resistance lines.
Two of the popular indicators suggest that a bottom is close or already in. The RSI
Indicator has just bounced from the lowest levels since the October 2008 low. In other words, according to this tool, the precious metals stocks present a buying opportunity not seen since then.
Another indicator that has been useful in the past in timing bottoms in the PM stock sector is the Stochastic Indicator. It is clearly below the 20 level - at the blue horizontal line - which marked a great buying opportunities in the past.
Was that not enough of bullish signals, the more detailed analysis of the previous breakdowns provides us with one more confirmation. Please note that breaking below the previous support lines drawn from the October 2008 bottom (marked with dashed lines) meant that the decline is more or less 50% complete. It is the case also today, which suggests that even if we were to move lower from here, the second bottom of the double-bottom formation would not be much lower.
But wait - there are even more PM-stock-bullish signals. The following one comes from our own indicator that I designed to detect favorable buying opportunities.
According to the current value of the SP Gold Stock Bottom Indicator (relative to the dashed horizontal lines), we are right at or very close to a local bottom.
Speaking of short term, let's take a look to the short-term chart of GDX ETF and see if it provides us with additional timing details.
As I mentioned above, the current downswing has just touched the 50% Fibonacci retracement level, and that the value of the GDX ETF dropped below the long-term support line more or less by the same about that it declined before reaching it. The top was at $49.8, and the price broke the support line at $45, so in fact the move will be symmetrical (relative to the support/resistance line) if GDX moves lower to about $40-40.5. This would correspond to the 61.8% Fibonacci retracement level - clearly strong enough to hold given the rapidness of the decline (the more rapid a move is, the more "emotional" it is, and consequently more prone to be correctly predicted using the technical analysis).
Does it have to move lower because of this symmetry? Of course not. Similar events took place in the past and history often rhymes, but again, the symmetry was not very precise back then, so I would expect it to work on a "more or less" basis also here. This implies that it is quite possible that we would move to the $40 level, but it is not very probable.
There is one more chart that I would like to feature before summarizing - the Gold Miners Bullish Percent Index.
I featured this interesting tool back in June (which marked the bottom marked on the chart above), and since the situation (as far as the above chart is concerned) is very similar to the present one, I will quote what I wrote in the June 20th update and edit it to make it correspond to today's situation.
The Gold Miners Bullish Percent Index is a market breadth/momentum indicator and is calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart, which emphasizes strong moves while ignoring small ones) and the amount of all gold stocks in the sector. If every gold stock is rising, then the value of the index will be at 100%, which raises a red flag as everyone interested in the market is already in, and the top will soon emerge. If we're looking at sentiment, substantial momentum usually corresponds to investors eager to jump in at quickly rising prices because they believe prices will continue much higher and are afraid of being left behind. If we said that at 100% the indicator shows overbought conditions, then you can see on the above chart that at the current 61% level the indicator is not extremely overbought, nor is it oversold. The Gold Miners Bullish Percent Index is no longer signaling that lower prices are to be expected, which was the case several weeks ago. Since the value of the index does not need to be at the oversold levels for a local bottom to form (still it is helpful in timing the major bottoms), we might need to look for additional tools to help us.
If you look closely you will notice two such additional tools in the above chart. The RSI (Relative Strength Index) is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions.
The RSI also ranges from 0 to 100 with an asset deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and likely to become undervalued. If you look at the RSI indicator in the above chart, you can clearly see that it in fact just moved below the 30 mark.
Another indicator on this chart is the Williams %R, also a momentum indicator that is especially popular for measuring overbought and oversold levels during horizontal trends. Bullish percent indexes take values from 0% to 100% and obviously cannot rise above that level, so it can be viewed as a horizontal trend. Named for its developer, Larry Williams, the scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. What I find particularly interesting here, is that the %R indicator has signaled a "temporary oversold" territory only three times in 2009 - and that corresponded to the long-term buying points, and powerful rallies. The last time the %R indicator for Gold miners Bullish Percent index hit the -100 level was during the September bottom - a sizable rally followed. The same signal has just appeared in the recent days, which suggests that we will see PMs higher in the not too distant future.
Currently both: RSI and William's %R indicators suggest that a bottom is in or very close.
Summing up, the fundamental situation is still favorable for the precious metals market, and the main trends remains up. The medium- and short-term technical situation is very favorable for the precious metals stocks. The problem is that in today's globalized economy and even more globalized financial markets, no asset class or market exists without connection to other markets. In case of the precious metals market, it is the general stock market, and - most of all - the USD Index that need to be taken into account while estimating future price swings.
In other words, although the situation on the precious metals market is itself very bullish, the situation on the key driving markets is may pose a serious threat to PMs, because of their historical correlations. However, I will leave this part of my analysis to my Subscribers.
Again, if you did not check it out already, be sure to visit the newly introduced Free Charts section on my website. In addition to features already mentioned above, it allows you to see details of each stocks performance relative to gold/silver, how much under- or overvalued it is, and much more. All of the above is updated on a daily basis (including the interpretation) and available free of charge.
To make sure that you get immediate access to my thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.
Thank you for reading. Have a great and profitable week!
P. Radomski
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This week's Premium Update covers many crucial aspects of the critical situation on the precious metals market and on markets that influence it: USD Index, and the general stock market. There are four detailed charts featuring the USD alone, as this is the key topic this week. Other things that I covered include the seasonality on the silver market and in the PM stocks, the CoT analysis of the USD Index, the Gold Miners Bullish Percent Index, and more. I also comment on the recent developments in one of our own key indicators, and provide detailed instructions on how you can deal with the current situation in PMs.
