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Gold
has failed to breakdown significantly from the tight coil pattern it created
over a 2-month period. Failed breakdowns often mark key reversal points
in markets, especially after moves that take a while to play out. In a
downtrend, the duration of the move produces the angst and disgust that
causes most of the selling. Then the final break of support creates the
final flush out of the weak holders who didn't sell out earlier in the move.
When
there's not enough selling pressure to continue the breakdown, the market
often reverses higher in a fast and powerful manner. The selling pressure isn't there anymore and new buyers push
the market rapidly higher. The market basically gets caught looking in
the rear view mirror, expecting more of the same thing to happen forever.
Meanwhile, quickly and with force things change when many aren't paying
attention and a new trend develops.
After
the coil in gold broke down in late May I noticed that sentiment on gold
turned very bearish as if everyone was throwing in the towel. I even
heard a podcast that I've never witnessed bearish on gold, say it
wasn't a good time to buy gold. But as of yet, the breakdown
out of this coil has not produced significant follow through selling.
Check out the chart of gold below to see exactly how this has unfolded.
 
Clearly
$1280 is an important level going forward for gold since it represents
resistance from the coil, and is also where the 50 day moving average sits
currently. If gold can surprise the bears to the upside and complete
the failed breakdown things could get interesting.
What's
even more interesting than gold though is what has happened in the mining
stocks. GDX and GDXJ experienced only two-day breakdowns from their
coils. These breakdowns occurred on high volume, but the buyers
overwhelmed the sellers after merely two days. Then after drifting
sideways for a few days both GDX and GDXJ blasted higher last week.
GDXJ was able to get back above the 50 day moving average, above the
top of the coil, and is now threatening the 200 day moving average.
GDXJ also had record breaking volume in this latest move higher.
This is starting to look like textbook failed move to fast move higher
material, as just as quickly as the downtrend ended an explosive move higher
is starting to develop.
One
last thing to note is what has occurred in the mining stocks, relative
to gold. You would expect that if gold was to breakdown out of a tight
consolidation, and the bears were to win, that gold stocks would get punished
relative to gold since they tend to amplify moves in gold. But exactly
the opposite happened on this latest coil breakdown in gold. Taking a
look at GDXJ:GLD which compares GDXJ relative to GLD, we can see that immediately
after the failed breakdown in gold, gold stocks showed superior relative
strength. In fact not only did this ratio blast back higher but it got
back above the 50 and 200 day moving averages in a hurry. And on
massive relative volume.
In a
healthy gold market you want to see gold stocks outperforming the metal, and this failed
breakdown in gold at the end of May is starting to look like it is forming a
launchpad for a continued move higher in gold and gold stocks.
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