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Commodity Indicator Suggests Gold Stocks Are Retesting Their Lows


When commodities go up quickly, gold stocks go down quickly.

A commodity indicator recently reached an extreme reading. The low for the $CRB (a commodity index) over the last 20 months was on January 9. The 2014 high was on March 6. There were 38 trading days from January 9 to March 6. The indicator we will examine today is the $CRB RSI(38).
There were a few times the CRB RSI(38) reached the level it did on March 6. These were in 1980, 1983, 1987, 1988, 2005, 2008 and 2014.

Click to enlarge
When the $CRB RSI(38) hit 71, commodities soon ran into trouble. But gold stocks fared even worse. The following is a table of the peak indicator readings and subsequent gold stock declines which commenced around the same time.
The 1980 and 1983 gold stock declines were based on the Barron's Gold Mining Index (which is weekly) and the rest were based on the $XAU (daily). The reason for this is the data for the $XAU starts in December 1983.
The closest signal which did not quite reach the March 6, 2014 reading was on March 19, 1993 (+70.87). It is interesting to note that the top four major signals over the last quarter century were all from March 9 to March 19.
As you can see four of the signals led to 56% to 82% gold stock bear markets. The other two led to 24% to 28% declines which lasted about two months.
The pattern in the big declines is an initial down thrust which is followed by a rally. Let's look at the initial down thrusts.

What is interesting is four of the six prior instances had initial down thrusts which lasted 48 to 77 days. Since the peak thus far has been March 14, that would project into a 66% probability of a May bottom. Five of the six declines were from -22.17% to -28.12%. If the $XAU would have a similar decline it would bottom somewhere around 77 and 83. The $XAU bottomed at 82 in June and 79 in December. If history repeats, gold stocks will retest their lows.

James Debevec runs
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No positions in stocks mentioned.
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