Last week we wrote that the precious metals complex had not broken out yet
and had more work to do before it could attempt a true breakout. The metals
had some more upside and so did the shares. However, the poor performance of
the shares this past week could warn of a larger reversal.
We thought the gold miners could rally up to resistance at the 400-day moving
average. Instead of pushing a bit higher, their rally reversed course at the
200-day moving average. Note the action since last summer. The miners had a
strong rally up to the 400-dma and later recovered to both moving averages
when they were quite close in January. This recent rally did not reach the
400-dma and that signals weakness.
The weakness in the shares is a warning sign for the entire complex and could
also be a signal that the metals have not bottomed yet. Over the past eight
months Gold and Silver have essentially traded in a tight range (except for
several weeks). Gold has spent most of that period between $1150 and $1225
while Silver has spent most of that time between $15.50 and $17.50. The metals'
failure to extend recent strength could signal a move down to the bottom of
those ranges and threaten a breakdown.
Last week we noted that gold miners would only truly breakout (above their
80-week moving averages) if metals were to surpass their January highs.
I'm skeptical metals will do that on this rebound as their relative performance
is weak considering the big drop in the US$. The worst is likely over for
the miners but if Gold can't reach or takeout its January high then the miners
are at risk for remaining in the range they have been in for the past eight
months. Until something changes, buying support and oversold conditions works
better than chasing strength.
GDX has 12% downside to strong support and 17% downside to its daily low.
Be patient and use support to your advantage. If metals are heading to new
lows then it would likely create one last chance to buy miners at fire sale
prices.
