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Spring Rally Directly Ahead for Gold Stocks

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It may take a few more days or another week to confirm, but gold shares are set to rebound and have their best rally since last summer.

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Last week in Gold Fails to Break Support Despite Extreme Negative Sentiment, I wrote the following about gold:
We have the majority of sentiment indicators showing more pessimism than in 2008, an explosion in negative news coverage, and news that major banks have downgraded their outlooks. Without knowing anything else, you'd expect gold to be down considerably, yet it's only off about 5% year to date and 10% in the past three and a half months. Most important, gold hasn't even broken support!

Gold has failed to break below its 2011 and 2012 lows, and that is a telling sign -- especially in the face of this pervasive bearish sentiment. Gold looks likely to close at a four-week high, and I expect it to challenge $1,600 in the coming days. A close below $1,620 would essentially confirm that the bottom is in.

Meanwhile, the action in the mining shares has provided enough evidence that at the very least, a tradeable low is in. In recent writings I've noted the confluence of major support at HUI (INDEXNYSEGIS:HUI) 336-337. The trendline connecting the 2000 and 2008 lows, the 62% retracement of the 2008 to 2011 cyclical bull, and the 50% retracement from the 2000 low to 2011 high all coincided together very close to HUI 336-337. What was the recent low on the HUI? 337.



Next we want to turn your attention to the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). Starting with GDX we see the market formed a bullish reversal candle (hammer) last week with huge volume. In fact, the only higher weekly volume occurred at the May 2012 bottom when GDX also formed a bullish hammer.



Meanwhile, GDX's little brother, GDXJ is showing the same reversal candle and with equally as large volume. Look for GDXJ to rally to $21 where a confluence of resistance (moving average, former support) should come into play.



It may take a few more days or another week to confirm, but gold shares are set to rebound and have their best rally since last summer. The market became extremely oversold, sentiment reached an extreme, the market tested strong support (HUI 337) and then put in a bullish hammer reversal and on huge volume. This is how bottoms form. At the least, I expect a very strong (in percentage terms) tradeable rally to go into the spring. My firm accumulated shares in advance of this bottom and more last week as the HUI rebounded off 337.

As always, readers are reminded that stock selection in this sector is critical to success. Do your own due diligence and you can far outperform the indices. Two criteria I'd suggest using to begin screening companies are stocks that have held their 2012 lows and have strong working capital.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
No positions in stocks mentioned.

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