Gold Stocks: History Argues for More Upside
Judging from history, one should not be alarmed about the recent gains because these rebounds tend to run much longer and higher.
Below we chart the HUI (^HUI) in weekly form dating back to 2000. We also plot the HUI's rate of change for 18 weeks and 26 weeks (equivalent to four and six months) and we note the length of time it took the HUI to break to a new high following the start of the cyclical bears. The market typically rebounds 50%-70% four months following a bottom and roughly 75% six months after a bottom.
If the HUI rebounds 50% from the May 2012 low then we are looking at a target of 558 by or in October. That target is essentially on par with the Q1 2012 high of 555. Secondly, a six month rebound of 65% would take the HUI to 615 (exactly the level of the red line) by or in December. Even if these targets are hit a month or two later, we still would experience a bullish outcome. Keep these targets in mind as we move to short-term analysis.
Next we chart Market Vectors Gold Miners ETF (GDX), Market Vectors Junior Gold Miners ETF (GDXJ) and Global X Silver Miners ETF (SIL). In recent days these markets achieved significant breakouts on 'gap up' moves. Monday's action is a strong signal that these markets could fill their open gaps (see circles) and then retest previous resistance which is now support. GDX is very comparable to the HUI. The initial rebound target for the HUI (558) is equivalent to GDX $57. Furthermore, $57 is the 62% retracement (from the 2011 high to 2012 low) and the target from the length of the W bottoming pattern ($48-$39 = $9, $9+$48=$57).
While gold and silver equities have had a strong run, they have only broken out from their multi-month bottoming patterns. A retreat and fill of the gaps would alleviate the current overbought condition, temper sentiment a bit, and facilitate another strong leg higher. Moreover, judging from history, this rebound still carries substantial upside potential in the coming months. Traders and investors should look to take advantage if the miners fill their gaps and retest the breakout.
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.