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Possibility for Bounce Up in the Precious Metals Market

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As the short-term outlook for the US dollar is bearish, the implications are more bullish than not for gold, silver, and gold and silver mining stocks.

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On Tuesday, gold prices continued to break down, falling for a fifth consecutive day breaking below the 200-day moving average. On February 6 we suggested getting out of the speculative long positions, and reiterated it once again just a day before the crash. But this week on Tuesday, my firm's SP Gold Bottom Indicator flashed a long-term buy signal. We tend to take this particular signal seriously since it has proven to be uncannily accurate in the past.



In 2011, for example, it flashed a buy signal five times on:
  • January 24, right before a major bottom,
  • June 29, a few days before a major bottom,
  • August 26, followed by a $200 rally,
  • September 27, followed by a $150 rally
  • Dec 19, a few days before a major bottom
All in all, five out of the last five times this signal flashed, a substantial rally followed -- either immediately, or a few days later. Consequently, the situation in gold is now bullish for the medium term.

To see if our SP Gold Bottom Indicator will hit the mark yet again, let's take a closer look at the markets that can, at times, drive the prices of precious metals. We will start with the USD Index (charts courtesy of http://stockcharts.com.)



There has been no real change this week as the index rallied a bit early in the week and then declined. Thursday's closing level is a bit more than a point higher than a week ago, so the overall change for the week is quite minimal so far.

The index level is still quite close to the long-term resistance line and no breakout has been seen. At this point, the odds appear to favor a continuation of a downtrend here in the USD Index.



In the short-term USD Index chart, a small rally began after the cyclical turning point was reached, and the USD index approached the 80 level, reaching 79.92 only to decline thereafter. It is unclear whether the top is in or if higher index levels will be seen anytime soon.

The odds based on the long-term picture appear to favor a move to the downside with very limited upside potential from Thursday's closing index level. The downside target levels at this time appear to be close to two important support lines in the range of 77 and 75 respectively.

The situation is the USD Index is tense and at this time appears slightly more bearish than not for both, long and short term.



The long-term S&P 500 Index chart provides us with bearish indications this week. Target levels based on this chart in previous weeks were not reached as the S&P 500 moved about halfway between the previous top and our previous target of $1,320. This downside target level appears likely when comparing recent trading patterns with those seen at the end of 2010. The decline so far has been small, so more consolidation is possible before the rally resumes.



In this short-term SPY ETF chart, we see a correction to an important support line, followed by a move higher. This is a bullish indication and an immediate move to the upside is indeed possible from here.

The situation in the general stock market is mixed with small moves to the downside possible. The S&P 500 will likely go no lower than $1,320 and this appears to be about 65% to 70% probable.

We are not certain if the correction is over or if another move to the downside is coming; the long and short-term pictures are simply not clear at this time.



Our correlation analysis provides information that the coefficients between the precious metals sector and the general stock market weakened this week. The uncertainty in the stock market picture is therefore not as important for the precious metals, though it is a bit more important for silver than gold. The correlation between the USD Index and the precious metals remains in place and negative.

Please note that our general outlook on the precious metals market has changed from a bearish one to a bullish one. If you recall what we wrote in our last essay on precious metals and manipulation (March 6, 2012):
The situation (…) is normal once again (metals move along with stocks and in the opposite way to the USD Index). Consequently, what's bullish for USD and bearish for stocks is bearish also for the precious metals market.

The picture has changed now -- the rally in the dollar seems to be over and, therefore, the general short-term outlook for precious metals is more bullish than not. However, we would be far from suggesting that an immediate move up is a sure thing now.

Summing up: As the short-term outlook for the dollar is rather bearish and the greenback continues to trade in the opposite direction that precious metals do, the implications are more bullish than not for gold, silver, and gold and silver mining stocks. The medium-term trend is up.

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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