Precious Metals: Keep It Simple
Trading strategies for precious metals whether the sector breaks a new low or firms.
The first chart is the chart I published back in May when suggesting that a major bottom could be at hand. This weekly chart shows a rebound that may be fading yet the breadth indicator at the bottom (when smoothed) remains as oversold as it was in December and back in 2008. Note that in September 2008, the bullish percent index (four-week moving average) was at 50%. Today it stands at 14%.
The next chart from SentimenTrader.com shows the HUI Gold Bugs Index (^HUI) with three different breadth indicators. I show these not to state the obvious. I've drawn circles to let you draw your own conclusions. Should gold stocks retest the low then I'll be looking at these breadth indicators for potential positive divergences which would send a strong bullish signal.
One reason I've been optimistic is because the shares have performed well amid the flaccid rebound in gold and silver. The shares always lead coming out of rebounds, so that recent action is a positive sign. However, the shares won't perform well if gold and silver don't confirm their bottoms. In fact, there is noticeable but slight deterioration in the charts.
Gold has failed to recapture its 65-week moving average which has essentially supported the entire bull market ex 2008. Meanwhile, silver has failed to recapture its 120-week moving average which provided key support in 2010 and at the end of December. All that being said, it is important to recognize that a technical breakdown would be in the context of a correction in its latter stages. Gold is nearly 20% off its high while silver is about 45% off its high. The shares have essentially been in a bear market for 18 months. In other words, the metals could break to new lows, but I wouldn't expect the lower prices incurred from a breakdown to be sustained beyond the short term.
The plan of action should be fairly simple going forward. If the metals break to new lows, one should begin buying after the breakdown. Regarding the shares, one should begin accumulation on a retest of the low. What happens if these markets firm? In that case, wait for support to be confirmed and then accumulate. It is simple but it requires constant patience. In the meantime, if one is too heavily long, one could consider hedging exposure with the inverse ETFs. In my firm's research, we continue to focus on those companies best suited to rebound quickly and prosper from the coming cyclical bull market.
Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
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.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter