Precious Metals: Bottom May Be In, But Be Cautious
No market moves alone, and others are giving a warning signal.
This commentary includes comments on many markets, but will focus on precious metals stocks.
Let's begin with a long-term chart of the HUI Index (charts courtesy of StockCharts.com).
Much of what I've written regarding the long-term HUI chart is still relevant:
Please take a look at the thin blue lines coming from the same price/time combination. Each of them was pierced, before the final bottom was put in, and this is what I expect to take place this time.
...taking the historical performance of the gold stock sector into account, it seems that PMs will need to move a little lower before putting in a bottom.
The bottom is likely to be accompanied by the RSI Indicator just above the 30 level.
This is exactly what we saw yesterday -- the RSI is very close to the 30 level (blue horizontal line on the above chart), and HUI has broken below the rising support line just like it was the case in the past before the bottom was formed.
Consequently, the HUI Index appears oversold, and it's likely that the bottom will be formed soon. Still, it doesn't mean that the bottom is in, as prices may go from oversold to even more oversold in the short run.
Two of the following points that I made two days ago were that the GDX ETF has just touched its 200-day moving average and that the GDX ETF has moved very close to the lower border of the declining trend channel and the price that stopped the decline in early October 2009. Let's take a look at the short-term chart for details.
The short-term chart confirms that the GDX ETF is currently very close to the bottoming area (that was drawn two weeks ago), which means that one may want to get ready to buy as far as the speculative capital is concerned.
Volume doesn't provide us with a clear "the bottom is in" signal. During the last two days the volume has been lower than in the previous three days, but it isn't extremely low to suggest that there's hardly any selling pressure on the market.
The next thing that I've mentioned before was the GDX:SPY ratio (used to measure outperformance of precious metals (PM) stocks relative to other stocks) that reached a strong support level. Please take a look at the following chart for details.
Tops and bottoms in the above ratio tend to correspond to tops and bottoms in the PM sector, so analyzing it often confirms (or invalidates) points made while analyzing other charts. This time the ratio has just hit a long-term support level, which suggests that the bottom in PMs is very close, or that we've just seen it. Please note that not only did the ratio itself reach a support level, but the RSI indicator is also flashing a "buy" signal.
Before summarizing, I'd like to provide you with the description of one more point. I wrote that my firm's unique indicators have flashed a buy/extreme signal. You'll find one of these charts below.
The SP Short Term Gold Stock Bottom Indicator has turned up while being under the dashed line, which is when it flashes a buy signal. Please note that in the past several months this signal has been very reliable.
Summing up, signals coming from the precious metals stocks suggest that the bottom is in or is very close. However, given the current level of globalization in the economy and financial markets, one must keep in mind that no market moves alone -- they're connected in this or the other way.
From time to time realizing this fact makes me get additional confirmations from markets that one would normally ignore. This time, however, I get a "caution warranted" signal from other markets, and I don't think that one should totally ignore it.
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