This essay is
based on the Premium Update posted on June 20th, 2009
In my previous
Premium Update I have emphasized the meaning of sentiment and how one can
analyze it to gain advantage over other market participants. I have received
very positive feedback after posting it, so I decided to include a part of
this week’s update dedicated to sentiment also into the publicly
available free commentary.
Last week I
mentioned two common indicators that can help gauge sentiment: the S&P
Energy Sector Bullish Percent Index and Gold Miners Bullish Percent Index.
From our point of view, as precious metals investors, it is the Gold Miners
Bullish Percent Index that is particularly interesting. Charts are courtesy
The Gold Miners Bullish Percent Index is a market breadth/momentum indicator
and is calculated by dividing two numbers: the amount of gold stocks on the
buy signal (according to the point and figure chart which emphasizes strong
moves while ignoring small ones) and the amount of all the gold stocks in the
sector. If every gold stock is rising, then the value of the index will be at
100%, which raises a red flag, as everyone interested in the market is
already in, and the top will soon emerge. If we’re looking at
sentiment, substantial momentum usually corresponds to investors eager to
jump in at quickly rising prices because they believe prices will continue
much higher and are afraid of being left behind.
If we said that
at 100% the indicator shows overbought conditions, then you can see on the
above chart that at the current 70% level the indicator is not extremely
overbought, nor is it oversold. The Gold Miners Bullish Percent Index is no
longer signaling that lower prices are to be expected, which was the case
several weeks ago. Since the value of the index does not need to be at the
oversold levels for a local bottom to form (still it is helpful in timing the
major bottoms), we might need to look for additional tools to help us.
If you look
closely you will notice two such additional tools in the above chart. The RSI
(Relative Strength Index) is a technical momentum indicator that compares the
magnitude of recent gains to recent losses in an attempt to determine
overbought and oversold conditions.
The RSI also
ranges from 0 to 100 with an asset deemed to be overbought once the RSI
approaches the 70 level, meaning that it may be getting overvalued and is a
good candidate for a pullback. Likewise, if the RSI approaches 30, it is an
indication that the asset may be getting oversold and likely to
become undervalued. If you look at the RSI indicator in the
above chart, you can clearly see that it in fact just touched the 30 mark.
on this chart is the Williams %R, also a
momentum indicator that is especially popular for measuring overbought and
oversold levels. Named for its developer, Larry Williams, the scale ranges
from 0 to -100 with readings from 0 to -20 considered overbought, and
readings from -80 to -100 considered oversold. What I find
particularly interesting here, is that the %R indicator has signaled a
“temporary oversold” territory only once in 2009 – and that
corresponded to the long-term buying point (also signaled by the SP Gold
Bottom Indicator), and a powerful rally. The last time the %R indicator for
Gold miners Bullish Percent index hit the 100 level was on April 17th
when gold closed at $869. A powerful rally followed which took gold to $989
in about six weeks. The same signal has just appeared in the recent days with
the Williams %R at 80, which suggests that we will see PMs higher in the not
too distant future.
Please keep in
mind that none of this is a “sure bet” that we will immediately
go higher – there are no certainties in any market. However, in my
opinion this scenario is likely and it seems that it will be profitable to
bet on higher precious metals and mining stocks prices and to position
Moving on to the
technical analysis of the precious metals sector, I will begin with the gold
The above chart
suggests that the bottom might be already in place, as the support levels
have been reached. The 50% Fibonacci retracement level is particularly
important here, as gold often corrects 38.2%, 50%, or 61.8% of the preceding
rally, before moving higher. The bottom materialized precisely in middle of
the predicted area, and it has been confirmed by the “buy” signal
from the stochastic indicator.
The latter is a
momentum indicator that shows the location of
the current close relative to the high/low range over a set number of
periods. Closing levels that are consistently near the top of the range
indicate buying pressure and those near the bottom of the range show selling
pressure. It has crossed its moving average (red slope) and is now moving
higher. This meant higher gold prices in the past, so it is likely to be the
case also now. Please note that during the previous several months, each time
such a signal corresponded to a local bottom in gold.
don’t view this as highly probable, one more test of this
week’s low is not out of the question.
Silver has also
moved to the levels mentioned last week. The Fibonacci levels are similar to
what happened in March. The action in the stochastic indicator suggests that
we may in fact see a double bottom here. However, please remember that
technical signals on the silver market are less meaningful than in other
please note that the March bottom took place on very high volume. The Monday
low when the SLV ETF closed at 13.83 also was characterized by very high
volume, which suggests that this bottom was a significant one. While
it’s true that history does not always repeat itself, it does so
frequently enough to use this principle in one’s trading.
have declined this week, as indicated in the previous Premium Update. The
sector has been falling for 3 consecutive weeks, since the beginning of June,
and that alone suggests that at least a breather is to be expected. Still,
there are many factors that suggest that a bottom has already been put this
week. While this may turn out to be the first bottom, of the double-bottom
formation, this is not very likely. Obviously, it can happen, but if it does,
it likely will be a temporary phenomenon. I will be monitoring markets
closely and report to my Subscribers.
make sure that you get immediate access to my thoughts on the market,
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by Przemyslaw Radomski