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Is the Correction in Precious Metals Over?

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The situation overall for gold is bullish from the short, medium and long-term perspectives.

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Let us now turn to palladium, as its bearish implications for the precious metals sector that we discussed a week and a half ago (see Silver Stocks Vs. Palladium) seem to have just been invalidated.



In the chart we see an invalidation of a breakdown below the declining support line, and the picture is once again bullish here. The bearish implications of this chart for the precious metals are no longer present.

Finally, we'd like to draw your attention to precious metals mining stocks, as one important chart that we'll discuss below indicates that they may prove to be an exceptional investment.



Today we include a chart, which has not been used for some time, the Gold Miners Bullish Percent Index chart. We have been monitoring this on an ongoing basis and it has just flashed a buy signal. This happens when the RSI and William's %R go into overbought territory. Even though the exact bottom has not been reached, it will likely be reached soon, and this is yet another bullish confirmation.

As a reminder:
The Gold Miners Bullish Percent Index is a market breadth/momentum indicator and is calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart, which emphasizes strong moves while ignoring small ones) and the amount of all gold stocks in the sector. If every gold stock is rising, then the value of the index will be at 100%, which raises a red flag as everyone interested in the market is already in, and the top will soon emerge. If we're looking at sentiment, substantial momentum usually corresponds to investors eager to jump in at quickly rising prices because they believe prices will continue much higher and are afraid of being left behind. Since the value of the index does not need to be at the oversold levels for a local bottom to form (still it is helpful in timing the major bottoms), we might need to look for additional tools to help us.

If you look closely you will notice two such additional tools in the above chart. The RSI (Relative Strength Index) is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions.

The RSI also ranges from 0 to 100 with an asset deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and likely to become undervalued. If you look at the RSI indicator in the above chart, you can clearly see that it in fact just moved below the 30 mark.

Another indicator on this chart is the Williams %R, also a momentum indicator that is especially popular for measuring overbought and oversold levels during horizontal trends. Bullish percent indexes take values from 0% to 100% and obviously cannot rise above that level, so it can be viewed as a horizontal trend. Named for its developer, Larry Williams, the scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings from -80 to -100 considered oversold. What I find particularly interesting here, is that the %R indicator has signaled a "temporary oversold" territory only three times in 2009 - and that corresponded to the long-term buying points, and powerful rallies. The last time the %R indicator for Gold miners Bullish Percent index hit the -100 level was during the September bottom - a sizable rally followed. The same signal has just appeared in the recent days, which suggests that we will see PMs higher in the not too distant future.

Currently both: RSI and William's %R indicators suggest that a bottom is in or very close.

Summing up: The situation overall for gold is bullish from the short, medium and long-term perspectives. Long investment and speculative positions in gold appear to be well justified at this time. Also, the Gold Miners Bullish Percent Index combined with the overall situation in the precious metals market make mining stocks a great investment opportunity.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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