In this report I’d like to look at some of the Precious Metals stock indexes as there has been a fairly strong reversal off of the previous lows made over the last two months. It was one of those inflection points where the PM stock indexes could have gone either way. It just so happened that they all had a decent bounce off the lows with the last two trading days being up.—
We’ll examine some of the PM stock indexes in a minute but I would first like to show you the Gold Miners Bullish Percent Index (BPGDM) as it’s still showing a buy signal that was generated three weeks ago.
The reading of 46.67 is the highest point the BPGDM has reached in about year, so there is some underlying strength. The BPGDM is above the 5 DMA and the 5 DMA is above the 8 DMA so the buy signal remains in place. Also the price action is still finding support at the neckline of the potential one plus year inverse H&S bottom.
Let's look at the ARCA Gold Miners Index (GDM) which shows the price action this past week hitting the bottom of the 2 month trading range and getting a nice little bounce. Reversal point #4 was the inflection point where GDM could have gone either way.
Right now it’s finding some resistance at the neckline of the small H&S top that formed at the top of the trading range. Friday, GDM closed back above the 50 DMA. We’re back to the same old question: Is this 2 month trading range going to be a consolidation pattern to the upside or will it end up being a reversal pattern to the downside? Since we don’t know, I’m going to play the trading range until the true trend emerges. Sometimes these types of trading ranges can go on for a long time with several more reversal points taking place.
Below is a daily line chart that shows a potential expanding triangle forming, with last week's low breaking below the previous low as a possible 4th reversal point. Again, this can be a consolidation pattern or a reversal pattern once we get some confirmation one way or the other. The expanding triangle won’t be complete until the top rail is hit at potential reversal point #5.
The weekly chart for GDM shows our potential inverse H&S bottom with the two month red trading range forming right on the neckline. The neckline held support again this week at 709 which is now a very important area to watch. I’ve added two price objectives if either the inverse H&S bottom or the red trading range plays out. Just keeping an open mind.
This next short term daily chart for GDM shows Sir Matrix’s 'four horsemen' indicators which show the faster TSI and MACD crossing over, while the longer term TSI and MACD are getting closer, but are not quite there yet.
This long term monthly chart for GDM shows how we could see the potential inverse H&S bottom play out to the upside. Should this happen, it would take the price action back up to the old neckline around the 1070 area. If that were to occur, the bulls would say the bull market is back while the bears would view it as a counter trend rally in a bear market, which would be the camp I would be in.
As you know, anything is possible. I think most PM investors are either really bearish or really bullish leaving little room for compromise. If GDM breaks out of this 2 month trading range to the upside, then I think this scenario would come into play. On the other hand, if the PM complex stalls out right here and the GDM breaks below the bottom of the 2 month trading range, taking out the neckline at the same time, then the bearish scenario would come into play. Right now all we really have to work with is the 2 month trading range which we’ll trade until we get some confirmation of an impulse move either up or down.
Next I would like to show you some weekly charts for some of the PM stock indexes that shows the potential inverse H&S bottoms we’ve been following for a long time, waiting for some type of resolution. Let's start with just a simple weekly chart for GDM that shows its potential inverse H&S bottom. As you can see, it has had a breakout and 8 weeks of backtesting from the topside of the neckline.
The ARCA Gold BUGS Index (HUI) has been one of the weaker PM stock indexes as it still hasn’t really broken above its neckline which would confirm a breakout. You can see the price action bunching up just below the neckline.
The Philadelphia Gold/Silver Index (XAU) still hasn’t broken out yet either, but it has tried several times to do so.
The Market Vectors Gold Miners ETF (ARCA:GDX) has broken out of its inverse H&S bottom in similar fashion to GDM and has been in backtest mode for 8 weeks now.
The Market Vectors Junior Gold Miners ETF (ARCA:GDXJ) chart shows it too has broken out of its inverse H&S bottom and is still in the backtest mode.
The Global X Gold Explorers ETF (NYSE:GLDX) chart shows it has a potential double inverse H&S bottom but has failed to hold above its neckline so far.
The Global X Silver Miners ETF (NYSE:SIL) chart shows what I call a 2 1/2 point double bottom with its 8 week consolidation pattern forming a red flag right on the S&R line.
You may have become aware that the PM stocks have been acting stronger than Gold lately. The HUI:GOLD ratio chart shows you why as it has formed an inverse H&S bottom. Keep in mind both can fall together, but if gold falls faster than the HUI the ratio will still show a rising price trend so it can be a little deceiving at times.
The weekly chart for Silver shows it's been walking down the black dashed S&R line that has been holding support since it was broken to the upside earlier this summer, reversing its role from resistance to currently, support. The million dollar question is, will it continue to hold support?
Silver’s inflection point, or the point where silver has to start showing some strength or it could be bad news for this precious metal, is fast approaching. The situation can still be saved if silver can start to rally immediately.
The daily chart for gold shows the triangle we’ve been following, which I said should be watched since it had the potential 5th reversal point for a short term bounce and then the break of the bottom trendline. The alternate scenario was if gold showed more strength, down at the inflection point at reversal point #5, it was possible to see gold rally back up to the top rail.
So far we’ve gotten the initial bounce, now we have to see how strong gold really is and if it can keep on rallying.
With the US dollar showing strength, it will probably produce a headwind for the PM complex.
The Japanese yen is quite oversold right now and could see a backtest to the underside of the blue triangle it broke out of several weeks ago. This could give gold a little boost for a while if that were to happen.
On this last chart, I’ve overlaid gold on top of the yen. As you can see, the correlation is pretty close. This past week though, the correlation wasn’t as good as it has been. As I said, it’s not perfect but they generally run together.
I have spent quite a few hours over the holiday weekend reviewing many PM stocks, from the juniors to the large caps. If—and this is a big if—we see some strength this coming week in the precious metals stocks, I will start posting some entry points for a short term trade. At this moment we are in the middle of the 8 week trading range so this is how we’ll trade the PM complex until we see confirmation of a move one way or the other.
We’ll sell at the top and buy the bottom. Stock markets are still in rally mode, but with the SPX and the Dow 30 trading at their all time highs we may see a little hesitation before going higher. It should be an interesting week since the summer doldrums should now be over.