The precious metals sector moved lower yesterday. Silver moved $0.62 below the level at which the stop-loss had taken you out of the market and about $1.15 below the levels at which the previous buy signal from the SP Indicators had expired.
The silver:UDN ratio reached - once again - the declining support line. The very same that stopped declines in early November 2012, late December 2012, and late February 2012. As it was the case on these occasions, the RSI Indicator is close to the 30 level (30.45).
Quoting from yesterday’s Alert, "it seems that the buzz about the S&P Index moving to its 2007 high (1,576.09) is what makes investors so optimistic in general and at the same time unwilling to buy the anti-assets - precious metals and mining stocks. If stocks fail to move above their previous high - and we think that this will be the case - gold and the other metals/miners could very well attract more attention."
Yesterday, the S&P 500 moved to 1573.66, so it's still a few points away from the 2007 top. Stocks will likely attempt to move above this level, so we could see it reached today. The whole world will be watching this attempt and the situation could become very volatile if the breakout is quickly invalidated.
The Transportation Average declined yesterday, and the DJTA:DJIA ratio (Transportation to Industrial Averages ratio) declined as well. This is a good sign as this ratio has been negatively correlated with gold, silver and mining stocks for months - particularly strongly since August 2012.
The Euro Index is in the target area that we described in the latest Premium Update and seems ready to move higher once again. This has bearish implications for the USD Index.
The HUI Index moved to its previous low and, at the same time, to its long-term rising support line. The decline was quite significant, but it doesn't change the bullish picture just yet. Quoting from the latest Premium Update:
RSI levels are still significantly oversold even though they are now moving higher. We see only two cases in the past 13 years where gold stocks were so oversold: in 2000 and in 2008. In both cases, when RSI levels began to rise, the following rally in mining stock prices was sharp and took the gold stocks much higher very quickly. At this time, it seems that we could see a retest of the very long-term rising support line here, but as long as the index remains above this line (currently at 335), the situation will remain positive – and the above-mentioned, sharp rally will remain likely.
We are just seeing a re-test of this important support line right now. Our stop-loss level is set at 328, so that a visible breakdown below this line would take you out of the market. If the breakdown below this line was verified, the next target would be 270 and we might suggest opening a very short-term short position if this actually happens. At this point, however, the long-term trend has not been invalidated and the situation remains bullish. If a move below 328 is seen in the HUI Index we will likely suggest closing the speculative long position in gold even if it doesn't move below its stop-loss level ($1,544 currently). We will also consider limiting the long-term investment position in the precious metals sector.
Our soon-to-be-released tool is still predicting lower gold and silver prices but it just predicted higher prices for several mining stock companies.
Meanwhile, the SP Gold Stock Extreme #2 Indicator flashed a buy signal for the whole sector, so the SP Indicators overall suggest going back on the long side of the market after having suggested being out of it in the past two days.
Overall, the situation is extreme because another significant daily decline could trigger a much deeper decline in the coming weeks. Sounds bearish, but at the same time it is precisely what makes the situation so bullish right now - you buy when everyone is fearful, when the asset is hated, and when the price is low. And it surely is low if you have it right at the long-term support line that was not broken.
Summing up, full speculative long positions are suggested in gold and mining stocks, and half of the usual speculative long position is suggested in case of silver. The stop-loss orders for half of these trading positions in gold and mining stocks (HUI) are: $1,544 and 328, respectively (the other half of these positions is not subject to stop-loss levels).
We continue to suggest staying in the precious metals market with your long-term investments.
As always, we'll keep you updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of April, 2013 and we will send additional Market Alerts whenever appropriate.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
