In my articles you've heard me
talk about accumulating on weakness, buying support, being patient and
waiting for better opportunities. Folks, this next week is one of those
opportunities. The mining stocks have been a disaster if you've invested in
the average fund, GDX or GDXJ. If you've invested in the wrong stocks,
they've been a total disaster and you now hate the sector forever. We've
certainly been surprised by this protracted struggle. However, the gold
shares are set to test a major bottom and could be on the cusp of a major
reversal which could begin as soon as next week.
The gold stocks are setting up
similarly to the bottom in 2005. Let me explain. The gold stocks made a major
double bottom in 2004 and 2005. The first bottom occurred in 2004 and the
second in 2005. Interestingly, the 2004 bottom was its own double bottom.
Following that the gold stocks rallied significantly for several months before
eventually giving it all back. Note the circles on the chart as they compare
to the current situation. Below is a chart of the HUI in 2004-2005 with the
HUI/Gold ratio plotted at the bottom.
Larger Image
In 2012 the HUI formed a small
double bottom and then rallied strongly for a few months (like in 2004).
Similar to 2005, the market has given all of that back and in the process the
HUI/Gold ratio broke to a new low. The question now is will the HUI form a
major rebound similar to the one in May 2005 and cement a long-term double
bottom? Correlation is not causation but we should be aware of the potential
for a strong rebound.
Larger Image
Aside from the 2012 double
bottom support, there is major trendline support around the 350 area. In the
short-term, a move below the May 2012 low would constitute a major breakdown.
However, it could be a test of the bull trendline and induce a bear trap and
major reversal. On a very long-term chart, the difference between 375 and 350
is barely noticeable. The chart below shows the trendline connecting the 2000
and 2008 lows.
One should buy when the sector
becomes extremely oversold on a very short-term basis. Look for a bad day
followed by a gap down the next day which produces big losses intraday. This
is the type of action that precedes bottoms in the mining stocks. In this
sector buying extreme weakness is a better strategy than buying breakouts.
Traders can buy GDX, GDXJ or NUGT for leverage. For stock pickers, look for
stocks with strong fundamentals which have held up well in recent days and
weeks. Those stocks will produce good rebounds.
