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Was That the Top?

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Precious metals give some important clues.

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Moving on to the technical side of the market, this week, I'll provide you with the analysis of the white metal, followed by comments on the current situation in the precious metals stocks.



The chart of silver is much clearer than the one featuring gold, as there has lately been no parabolic upswing in the white metal.

Instead, we see that silver is getting very close to the next cyclical topping area (marked with red vertical lines). This, accompanied by the fact that silver is very reluctant to move above the thick blue resistance line, creates a very high probability that silver won't move above its March 2008 high before the correction, and possibly not even above the July 2008 high.

Given the very high level of correlation between gold, silver, and precious metal stocks (after all, miners' profits depend on the prices of metals), the tops on these markets are likely to be formed either at the same time or at least close to each other.

Please take a look at the HUI Index chart for more details regarding timing.



The precious metals stocks have been moving higher very rapidly in the past weeks, but they're now reaching a super-strong resistance level -- their 2008 high.

The strength of the resistance level is even bigger because the HUI Index is also reaching the upper border of the trading channel, and the RSI indicator is very close to the "sell" zone.

Based on the historical performance, technical analysis, and my own experience, it's likely that this rally will be stopped, at least temporarily, before gold and silver stocks are ready to move significantly higher.

More clues come from the analysis of the GDX:SPY ratio, which features the way precious metal stocks have been outperforming the general stocks market.



The ratio has finally broken out of the consolidation pattern, but has now reached a critical resistance level just above 0.5. Therefore, we might expect some kind of consolidation. Since the breakout has been verified in a rather insignificant way, the ratio may once again move to the 0.45 level before heading north once again.

The analysis of volume confirms this. In the past, the GDX:SPY ratio topped on a relatively high volume, and this is what we have just seen. Moreover, the RSI indicator is at the level that marked a top in the past, so the odds of a sell-off from here are even higher.

The top in the above ratio is very likely to correspond to top in the precious metal stocks, and also to the top in the metals.

Summing up, the fundamental outlook remains positive for the precious metals market, and consequently, their prices are likely to rise in the long run.

However, there are many factors pointing to a correction in the short term. The gold market is currently very hard to analyze because of the parabolic shape of the rise, but virtually all other markets suggest that a correction is either possible, or even very likely.

Thank you for reading and have a great and profitable week!


This essay is based on the Premium Update posted December 4th, 2009. Subscribe today for the full version of this essay, which includes much more detailed analysis, many additional charts, and rankings of top gold/silver juniors.
No positions in stocks mentioned.
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