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Metals Rallying Strong, But May Get Tripped


Watch for other markets' effect on precious metals.

The precious metals market is correcting, as I mentioned it in "How Long Will the Dollar Keep Drowning Metals", 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.

The mining stocks sold off heavily in the past two weeks but have now reached significant support levels, and the technical situation is 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's clearly below the 20 level -- at the blue horizontal line -- which marked great buying opportunities in the past.

If those weren't enough bullish signals, the more detailed analysis of the previous breakdowns provides us with one more confirmation. 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's the case also today, which suggests that even if we were to move lower from here, the second bottom of the double-bottom formation wouldn't 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're right at or very close to a local bottom.
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No positions in stocks mentioned.
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