I have to admit, I never saw
the gold stocks correcting this much. After making a textbook double bottom
and registering very strong momentum readings, I expected a relatively tame
October correction to be followed by another leg higher into year end. I
thought GDX would bottom at $49. Obviously I was wrong on all counts. It's
difficult to make predictions when they are about the future. Kidding aside,
forecasts are only a guide or a potential roadmap. No one can predict the
future. However, we can assess risk, reward and probabilities. We think the
probabilities favor a secondary bottom in the gold stocks and very soon the
risk/reward dynamic will be heavily in favor of longs.
Posted is a chart from sentimentrader.com. Their sector
sentiment indicator is a combination of short interest and put-call ratios.
It can't get much worse for the gold stocks. (Well, perhaps just a bit).
Next, we want to look at the
breadth of the gold stocks. Breadth is a measurement of participation. I
wanted to look at a large group of stocks and measure their breadth at major
bottoms and at secondary bottoms. For simplicity, I looked at the number of
stocks trading above their 200-day moving average. The results are in the
chart.
I wanted to compare the
current breadth to the breadth seen at the secondary bottoms in 2005 and 2009.
Note that at the major lows, breadth is usually at or near zero. At the
secondary low in 2005, breadth was 41%. The market was in a stronger
technical position then as the cyclical bear market was tame. In 2009, the
breadth at the secondary low was 20%. Go back to 2002-2003 and you'll notice
a triple bottom. Unlike the present there was no major technical damage. At
the third and final bottom breadth was 10%. Presently, breadth is at 38%. It
can fall to 20% and that would be in line with the most recent secondary
bottom (following a major bottom). The conclusion is that following a major
bottom long-term breadth should remain healthy. It still is.
Moving from the complicated to
the simple, here is one thought as to how this secondary bottom could play out.
We are watching $43 as it is both lateral and trendline support.
Larger Image
Less than three weeks ago we
wrote:
If we are indeed correct
that the metals and shares will remain range bound then your task is simple.
Prepare yourself for further consolidation by having your buy list ready and
then be ready to act when the time comes. A wise friend once told me that in
a bull market the goal is to accumulate positions at the lowest prices
possible.
It is always easy to say buy
later or buy on a correction. How often do we hear that? Rick Rule says that
when investing in the resource sector you are either a contrarian or a
victim. Consider the present sentiment and technical construct and it is
difficult to ignore this emerging contrarian opportunity. Oh and by the way,
the Fed is meeting next week. With gold stocks tanking into the meeting, it
provides the setup for a bottom and rebound into January. Now is the time to
be vigilant as the time to be a contrarian could be only days away.
Good Luck!
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