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Signs Point to a Turnaround for Mining Stocks

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It appears that the miners will once again begin a period of rally (if they haven't done so already).

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Investors' sentiment in the whole precious metals sector is so low that it seems like it almost cannot move any further below its current level. This has profound implications for the market; levels this low signal the formation of a bottom and a likely trend reversal.

I would like to quote one of the questions that my firm received recently as it is a good indication of how negative investors' attitude toward the yellow metal (which could be used as a proxy for the whole sector due to strong correlations between particular assets) is:
I am afraid that when gold reached $1,900 in 2011 it was too much and too fast and we are making a big mistake thinking that gold will go higher. I expect that Wall Street equities will soar for the remainder of 2013 and gold will do very poorly. There are many good stocks now and one can do very well by investing in these stocks.

However, my record for predictions of this sort is bad. I am hoping that this time my record will be horrible. If so, gold may go to $3,500/ounce.

Actually, this is how our editor "feels" as well. I can't say that I'm happy about the gold market and its performance at this point. Acting against such strong feelings historically proved to be profitable.Recall the "buying when there's blood in the streets" principle?

My firm has already written about the extreme situation in the gold and silver mining stocks market and it seems that there is even more tension in this market currently. The fundamentals and the negative sentiment at its peak bode well for investments in this sector. Let us move into today's technical portion to see what charts have to say – we will starts with junior mining stocks. (Charts courtesy of http://stockcharts.com.)



In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see a move below the 2012 low this week, but prices are still close to this level. Since juniors are so close to the declining resistance line, once a bit of strength is seen here, a significant rally is likely to begin. As the saying goes, "The longer the base, the stronger the move." The base period here is about six months so the rally could indeed be powerful.

Let us now move on to gold mining stocks. We'll use HUI Index (INDEXNYSEGIS:HUI) as a proxy here.


Click to enlarge

In this chart, which covers the whole current bull market for gold stocks, we can see that the support line created by the bottoms of 2000 and 2008 has almost been reached. It is not the only major support line in play, however. The 50% Fibonacci retracement level of the 2000 to 2011 rally is where actually half of the whole bull market has been retraced. At the same time, we see the 61.8% retracement level of the 2008 to 2011 rally. Since these retracement levels were reached, the bottom could very well be in, and the HUI Index may not move lower.

Please look at the indicators at the top and bottom of the chart. The RSI has only been this oversold in 2008 and 2000 both at major bottoms. The stochastic indicator at the bottom was only this oversold back in 2000. The situation now is in a way more extreme than 2008. A major bottom is likely in or very close to being in.
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No positions in stocks mentioned.
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