Unless you've been living under a rock then you have witnessed the now false
breakout in Gold and gold stocks. Our expectation was that the breakout would
take Gold to $1420 and the stocks up to their neckline resistance (GDX $30
and GDXJ $51) and then we'd see the first real correction since the December
low. Before you send in the hate mail, as some already have, let me remind
you that we've emphasized having an exit strategy and last week wrote, "You
sit tight until you decide to take profits or something changes." Something
clearly changed this week. The breakout was nullified and precious metals will
finish this week with a nasty candlestick that implies an interim top.
There are multiple reasons why recent price action will damage the recovery.
First, both the metals and the stocks were unable to rally back to summer resistance.
Second, false breakouts usually mark a key turning point. Recall that gold
stocks had a false breakdown in December before rebounding for three months.
This decline has also thrown the current recovery off course as compared to
history. We will come back to this point later.
Although the two big markets (GDX and GDXJ) failed to reach their necklines,
there are several parts of the sector that did reach their necklines. The chart
below includes the S&P TSX Index, the BMO juniors ETF (ZJG.to), the explorers
(GLDX), silver juniors (SILJ) and the Tocqueville Gold fund (TGLDX). The Canadian
market has been aided by the weakening loonie though nevertheless a fair portion
of the mining stock sector was able to rally back to resistance. The potential
head and shoulder bottom patterns are well intact for Canadian miners, exploration
companies, silver juniors and various mutual funds.
Meanwhile, GDX peaked at $28 and quickly declined below the recent consolidation
lows. The next support is the open gap at $24. We anticipate strong support
around $23. It marks the summer 2013 low (the left shoulder), the next low
in October and the underside of the brief but bullish consolidation that began
in late January. A decline to $23 would equate to a 17% correction which is
below the 21% threshold for major corrections (mentioned in past articles).
The large cap miners (GDX) have definitely veered off the recovery course
set by the analog chart posted last week. The significance of that, in our
opinion is not that the miners are headed to new lows. There is too much evidence
that they bottomed. It's far more likely that the off course movement indicates
that no upside move is imminent or likely in the coming weeks and that the
bottoming process (for the large caps) may not be complete.
Let's remember that the analog is only one tool among many and that the gold
stocks have only had a handful of major bottoms to study. Moreover, the 2011-2012
topping process in the gold stocks was unique in its length. The topping process
began at the tail end of 2010 and the first breakdown didn't begin until the
first few months of 2012. Perhaps the implication of that unusual topping process
is a forthcoming longer than normal bottoming process. It took GDX 15 months
to begin its breakdown move (December 2010 to March 2012). Currently, the mining
stocks as a whole are 11 months into their bottoming process.
To sum it up, a few things are clear. An interim top plus a strong low in
place equates to range bound activity over the coming months. Second, the eventual
push through neckline resistance is badly needed to kickstart the next bull
market. Until then sentiment will remain muted and bears will continue to press
their luck. The weaker stocks and indices could have a deeper correction while
the stronger stocks and indices will correct the least and presumably form
right shoulders. The next several months will offer traders and investors the
opportunity to patiently accumulate the strongest and best stocks ahead of
what will be, in earnest the start of a rip roaring bull market.
Good Luck!
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to outperform the sector then we invite you to learn
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