Technical analyst Clive Maund outlines why he believes the correction in
gold and precious metals stocks is coming to an end.
It now looks like gold's correction is done and its intermediate base
pattern is completing. If so, then we are at an excellent entry point for
many better precious metals (PM) stocks, which have been savagely beaten down
over the past several months�a necessary correction following their outsized
run-up earlier in the year.
On its one-year chart, we can see that gold's corrective action from early
July has brought it all the way back to its steadily rising 200-day moving
average, a classic buy spot, where a potential intermediate base has formed.
This corrective action has more than completely unwound the earlier
overbought condition, and it may well be that the price is bottoming at the
lower boundary of the large parallel uptrend channel shown, which is what
various factors suggest.
These factors are behind the major uptrend still in force, as symbolized
by the rising 200-day moving average already alluded to: the bullish
alignment of moving averages, the price being at the lower boundary of the
prospective channel shown, the earlier overbought condition having unwound
and, finally, the dollar looking like it is breaking down from its uptrend of
the past month, which we will look at later.
The seven-year chart for gold shows its new bull market in the context of
the preceding bear market from the 2011 highs. This new bull market ran into
trouble at the first resistance level shown, but after the recent correction
it should now gather itself to take out this resistance on the next upleg,
and target the next resistance level in the $1,520�1,550 zone. Needless to
say, an advance to this objective will result in PM stocks, which have been
severely beaten back on the correction, soaring to much higher levels. If
this interpretation is correct, then we are at an excellent entry point for
many PM stocks RIGHT NOW.
The 20-year gold chart is interesting, as it makes plain that the
2011�2015 bear market is really nothing more than a correction to the giant
bull market from 2001 that preceded it. It also shows that this giant
correction ended right at the zone of strong support shown just above the
zone of extensive trading that occurred in 2008�2009, a very good point for
it to reverse to the upside. The new bull market that is believed to have
begun early this year should take gold way above its previous highs in the
$1,900 area.
Another possible bullish factor for gold here is that the dollar appears
to be breaking down from its uptrend that started at the beginning of the
month, with an increasing risk that it will drop back across its range. We
can see this to advantage on the year-to-date chart for the dollar index.
The three-year chart for the dollar index shows that it's still no change
for the dollar, as it remains stuck in the giant trading range that started
to form back at the March 2015 peak. Right now, having approached the
resistance again at the top of the range, it looks like it is rolling over to
drop back across the range again, which will be good news for gold.
The one-year chart for GDX is most interesting. Many would-be PM-sector
stock buyers are currently deterred from doing so by seeing that the red
downtrend shown on our chart is still in force. However, it is very possible
that this index is close to the lower boundary of the larger order uptrend
channel shown�which is, of course, closely related to the parallel channel
that we have observed on the one-year gold chart.
If so, then we are clearly at a very good point to buy, as the index will
go on to break out upside from the red channel. Various factors strongly
suggest that this is what is going to happen. In the first place, the index
is close to a zone of strong underlying support, which arrested the decline
early this month. Second, the 200-day moving average is still rising
strongly, which shows that the major trend is still up. The moving averages
are definitely in bullish alignment, with any rally now turning the 50-day up
above the 200-day. Third, stocks are still oversold, after correcting back
from being heavily overbought early in July.
Last but not least, most would-be investors in the sector are cringing
timidly in the shadows as they usually are after a sharp drop. It's their
right to buy high, and nobody and nothing is going to stop them. This is made
abundantly plain by the Gold Miners Bullish Percent Index chart, which we
will look at next.
Finally, for those of you who are still feeling leery of buying gold
stocks here, take a look at the latest Gold Miners Bullish Percent Index
chart, which shows that sentiment has dropped from "foaming at the
mouth," 100% bullish back in early July, when for many there was no sign
of the impending sharp correction, to a paltry 18% bullish now. Ask yourself
if you felt more bullish toward the sector back early in July than you do
now, and you will have the answer to whether you should buy the sector now.
Sure, it could drop more from here, but technically it's a lot less likely
than it was back in July, and much more likely that a big rally starts soon.
Right now, gold and silver are thought to be powering up for another major
upleg, hence these latest updates.
Disclosure:
1) Statements and opinions expressed are the opinions of Clive Maund and not
of Streetwise Reports or its officers. Clive Maund is wholly responsible for
the validity of the statements. Streetwise Reports was not involved in the
content preparation. Clive Maund was not paid by Streetwise Reports LLC for
this article. Streetwise Reports was not paid by the author to publish or
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Charts provided by Clive Maund