Gold and Silver have held up well during the recent selloff in equities. From
December 28 through Wednesday the broad NYSE lost 10.4% while the S&P 500
lost 9.6%. Precious Metals gained strength during that period. Gold advanced
3.0% while Silver gained 1.7%. Gold relative to the NYSE broke its downtrend
and touched an 11-month high. Gold relative to global equities (excluding the
US market) reached a 2-year high. Precious metals have clearly benefitted from
the equity selloff but therefore figure to lose strength as the equity market
begins a relief rally.
Equities have become very oversold and are forming a bullish reversal. The
weekly candle chart of the S&P 500 is shown below. The market is forming
a bullish hammer (reversal candle) right at important support. The week is
not over but we expect volume to be sizeable. The last two hammers on big volume
came at the October 2014 and August 2014 lows. The market became extremely
oversold this week as only 15% of stocks within the NYSE were trading above
their 200-day moving average. That is the lowest figure in more than four years.
Furthermore, various sentiment indicators are showing extreme pessimism. The
AAII survey for example is showing the lowest amount of bulls since 1987.
The S&P 500 could rally as high as 1990 where there is major resistance.
Wednesday's low should hold for at least a few months.
The recent poor performance of the gold miners is another signal that the
metals (Gold and Silver) are at risk of making lower lows. During the aforementioned
period when the metals were positive the miners (GDX and GDXJ) lost 9.6% and
12.0%. That relative and nominal weakness is a strong signal that the recent
strength in the metals is unlikely to last.
GDX and GDXJ are charted below. The miners are recovering in part due to the
recovery in the stock market. They are also retesting Tuesday's breakdown to
new lows. The rally has been weak as there is strong resistance overhead in
the form of recent support ($18 for GDXJ and $13 for GDX) and the 50-day moving
averages.
Recent relative weakness in the gold miners along with the bullish reversal
in the equity market is a bearish development for precious metals. Gold and
surprisingly Silver have held up well amid the decline in equities. They enjoyed
a safe-haven bid yet are likely to lose that bid as the equity market begins
a relief rally. The gold stocks, while initially following the stock market
could resume their decline once metals have resumed their downtrends. Precious
metals bulls should wait for an extreme oversold condition amid extreme bearish
sentiment before turning bullish.
