I would like to start with an observation from one of my readers, as I believe it's a good way to show the distinction between tools that help you spot what direction the market is about to move and those that are better suited to time the exact reversal point, which is – in current circumstances – the final bottom in gold, silver, and the whole precious metals sector:
"One thing that I do is to look for price divergence with RSI and MACD and that is evident in the charts. Price has hit a lower low and RSI and MACD have hit a higher high/low. To me, that indicates a possible good time to buy GDX, GDXJ and mining stocks. This is a volatile time so it would be difficult to hold through this period. Also $BPGDM is at zero and can't go any lower."
There are divergences in numerous indicators now -- such as RSI and MACD -- on numerous precious metals-related indices and for individual mining companies. This, however, has been the case for some time. For instance, on the Market Vectors Gold Miners ETF
(NYSEARCA:GDX) chart, you can see that the early April low was accompanied by a higher low in the RSI indicator, and preceded by a move higher in MACD. The early March bottom was also accompanied by a higher low in the RSI indicator.
The point is that divergences are good at showing that a given move may be running out of steam, but are not that good when it comes to determining whether the bottom is in or not. With a reverse parabola in gold and a long-term cyclical turning point (which I wrote about in my last essay
), we are quite certain that the end of the decline is near, and that's all that the divergences confirm. They don't suggest whether or not the bottom is already in.
The Gold Miners Bullish Percent Index was indeed at the 0 level, and it couldn’t go any lower (it’s a bit higher today). But miners can. This index was at 0 in 2008 when the final bottom was formed. However, that's just a one-time event. It has some predictive power, but it's not all that strong as it's not a tendency. Statistically, we would have to see about 30 cases or more to speak of an existing relationship. But putting statistics aside, we would have to see at least a few cases with the same or similar outcome to say that this could be a tendency. Consequently, while the Gold Miners Bullish Percent Index being at 0 is a contrarian bullish factor, we think that other methods of analysis are more important right now.
Having briefly discussed some of the tools to time the final bottom, let’s see such tools in action. Let's move on to today’s chart section with the analysis of the silver market.
We will start with the very long-term chart. (Charts courtesy of http://stockcharts.com
Click to enlarge
In this chart, we saw particular intraweek volatility but prices overall are not much higher, increasing by just $0.25. The week was pretty much flat and very little changed with respect to price or outlook.
Getting a closer look at this chart shows further similarities with the declines of 2008. We saw a three-week consolidation period after the initial plunge before prices moved lower once again. Note how silver moved lower back then after initially correcting and closed the week close to the previous local low that ended the previous sharp decline. This is about where we are right now.
Based on weekly closing prices, we already have a breakdown below the early April low, which is another confirmation of the similarity between now and 2008. The self-similarity now suggests increased volatility and a big decline ahead.
Now, let’s turn to silver:gold ratio as it is yet another tool that – thanks to self-similarities – helps us time the upcoming bottom.
Click to enlarge
We saw no significant underperformance of silver this week. The ratio has pretty much traded sideways for several weeks now. Although there was a bit of interweek underperformance, it is much less visible than what we would expect based on the declines seen in 2008. The implication is that the final bottom is probably not yet in.
In the short-term silver ETF chart, once again we see that prices moved higher early in the week; this move was strongly invalidated on Wednesday with volume levels nearly as high as Monday and Tuesday combined. Prices did move higher on Thursday, but volume levels were pretty much average -- they were actually a bit weak if compared to volume levels of the past week, and less than one-fourth of what they were the previous day, so the move to the upside did little to change the overall outlook here.
Summing up, the situation in the silver market does not look all that bullish. The cyclical turning point suggests a bottom in a week or so, but my firm feels a need to see this confirmed by other markets. Placing our trust in this tool alone does not seem sufficient at this time. Even though we see divergences between many indices -- and particular mining stocks and main technical indicators -- they only support the claim that the final bottom is about to form, but give no direct clues as to when exactly it is going to be formed. Here, the self-similar patterns seem more reliable and the best idea in our opinion is to wait for more decisive signals.
For the full version of this essay and more, visit Sunshine Profits' website.
No positions in stocks mentioned.
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