It was exactly a week
ago when precious metals and main stock indices formed a bottom and provided
a favorable entry point for all willing to participate in the next move up in
the metals. Consequently we've sent out a Market Alert, and our Subscribers were able to get back
on the market during Monday's decline (with prices lower than there were at
the end of the session on Friday). While it may seem that the worst is behind
us, we still believe one needs to keep an eye on the situation in case it
turns around in a flash - especially, if the general stock market is to move
much lower from here.
Therefore, let's begin
this week's journey through charts with the general stock market (charts courtesy
by http://stockcharts.com.) After all, it was
this market that provided key signals last week, and which needs to be
currently monitored with great caution.
The reason for the
particular caution needed while analyzing the main stock indices is that we
have strong reasons (sentiment, technical, etc.) to believe that the current
downleg is a beginning of a more significant move down. This means that the
emotion that we need to deal with here is fear, not greed, which would be the
case if prices were rising. From a psychological point of view, fear is much
stronger emotion than greed, and taking a look at virtually any chart
reflects that. Declines are usually steeper than upswings, mostly because of
the abovementioned psychological reason. Consequently, the general stock
market needs to be monitored very carefully, because another move lower is
likely to be sharp.
The first thing that
comes into mind after looking at the above chart is that if this move is
indeed a beginning of a serious decline, then we are still in its early
stages. Please note that the Friday intra-day low was still much above the
200-day moving average, not to mention the first Fibonacci retracement level
of 38.2%. Actually, the SPY ETF would need to move lower by a similar amount
of dollars to what it already declined in order to reach the first
Naturally, the question
here is how low can the general stock market go during this plunge. Last
week, we mentioned that it is too early to say, and that it seems that the
decline is not even 50% over yet - and we don't have much to add this week,
besides stating that the first Fibonacci retracement (around the $96 level)
is likely to stop the decline at least temporarily.
The action in volume is
clearly negative, as the volume increased visibly along with lower prices and
this is the most important technical reason why we believe that there is a
90% probability that this was not the final bottom for this decline. Still,
the point made in the latest Market
is still up-to-date:
The general stock
market is likely to move temporarily higher and the corrective upswing may
take several weeks. It's much too early to say if the main stock indices will
move above the January high - for now it doesn't seem likely.
There is one more thing
that we would like to comment on before providing you with the gold chart -
namely, the fact that during the early part of the 2007-2009 downswing,
precious metals stocks were negatively correlated with the general stock
market. Please take a look at the area marked with the blue rectangle on the
above chart. For over 10 months PM stocks were trading in the opposite
direction to the general stock market - if one takes short time-frames into
account. Please note that tops in PM stocks were reached along with bottoms
in the main stock indices and vice-versa. Still, taking the long-term
perspective - both markets plunged dramatically.
The reason why we
mention this phenomenon in this update is that it shows just how tricky
relying on the stability of a given correlation can be. Today, we see that the
main stock indices are closely positively correlated with PM stocks and PMs
in general, but that doesn't mean that over several months these markets must
go in the same direction. We will keep our eyes open for additional clues,
and report to our Subscribers accordingly.
Moving on to the gold
market we see that the similarity that was visible during the latest decline
is still present after gold bottomed. This time, however, it suggests that
gold may soon need to consolidate for a week or so - just like it took place
in the past. Please take a look at the areas marked with red rectangles -
gold paused when it moved to the declining short-term resistance line (April
2009), or it broke above it and then verified it as support (October 2008,
July 2009). Should the history repeat once again, we can see a similar
pattern also this time.
Let's turn to the
short-term chart featuring the GDX ETF (proxy for PM stocks) for more
The volume in the GDX
ETF provides us with additional bullish signals, as it - contrary to the
situation in the SPY ETF - is higher during days when the price rises.
Moreover, the RSI indicator moved higher after having bottomed around the 30
level, which often served as a confirmation of a bottom in the past. One of
such examples comes from late October, when GDX started almost $15 rally.
It is too early to say
when will the next top materialize, as currently much depends on the main
stock indices. For now, it seems that the general stock market will
consolidates for some time, which will allow PM stocks to rally along with
higher PM prices. The situation on the general stock market can change very
quickly (just like it was the case a week ago), so one has to monitor it for
important clues. Naturally, we will send out a Market Alert to our Subscribers, should anything
important (from the Precious Metals Investor's point of view) emerge.
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Thank you for reading.
Have a great and profitable week!