Technical analyst Clive Maund discusses how precious metals prices would be impacted by the Fed's interest rate decision this week.
The Precious Metals (PM) sector correction may be completing RIGHT NOW, with sector indices at the 2nd low of a potential Double Bottom. Whether it is or not depends on the outcome of the Federal Reserve meeting—if it announces a rate hike, then both the broad market and the PM sector can be expected to break sharply lower.
If it doesn't—if it puts it off again till later, or never, then the PM sector should take off higher again. We cannot know in advance whether the Fed will hike or not, but we can be sure that its intentions have already been telegraphed to the 1%, so that they can position themselves to profit in advance.
Going solely on the year-to-date chart for the GDX (VanEck Vectors Gold Miners ETF (NYSE:GDX)), it does look like it is completing a Double Bottom at the support level shown, and setting up for another big rally, although it could break either way.
The chances of it breaking to the upside are now rated at 65%—against 35% for a breakdown—and it does make sense for the Fed not to hike, as its prime duty is to keep asset prices elevated for the benefit of the 1%, not look after the economy—it abandoned that responsibility many years ago.
This would in fact be a classic place for a major new uptrend to begin. The sector has endured its deepest correction since this new bull market phase began; that has seen many quality stocks correct back heavily.
The sector has gone from being heavily overbought at the start of July to substantially oversold, and is in a zone of strong support above a rising 200-day moving average, which signifies that the larger trend is still definitely up. Yes, it could drop further if the Fed hikes interest rates next week, and it is this fear that is of course deterring would-be buyers here.
How to handle this situation? Well, one approach is to jump on the best PM stocks the moment it is clear that there will be no rate rise, if this is the outcome, for the sector can be expected to finish the day with a big white candle before continuing higher.
Another approach is to take a chance and buy ahead of the announcement, and perhaps take out insurance in the form of Puts, in case a rate hike is actually announced and the sector then drops.
Whatever happens, the PM sector is certainly better value than it was two months ago, and statistically the odds favor the major uptrend resuming soon.
About The Author: Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years' experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.
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