The precious metals sector is oversold and due for a bounce. Miners and metals
have endured severe declines in recent weeks and are likely to rebound from
the 2014 lows. The miners are just starting to rebound and the metals should
follow. However, until proven otherwise this appears to be an oversold bounce
that could last only a few weeks. Potential danger lies ahead before a sustained
turnaround.
Below is Gold's weekly line chart dating back to 2007. The metal has traded
within in a slight descending channel for nearly two years. A break below such
a channel would typically lead to an accelerated decline. If Gold makes a clear
weekly close below $1150/oz then it could start to break lower in accelerated
fashion towards $1080/oz, the 50% retracement of the entire bull market. Gold
does not have strong support until the $1000 to $1040/oz range. Also, though
Gold is extremely oversold in a long term sense, that is not the case from
a near term view. A move below $1080/oz within the next seven weeks would bring
Gold to an extreme near-term oversold condition.
The gold stocks are entering the fourth year of their bear market and have
essentially repeated the 1996-2000 bear market. In the chart below we compare
the HUI's current bear with its 1996-2000 bear. Note that the HUI made a marginal
new high five months after the majority of mining stocks peaked. Otherwise
its resemblance would be even closer to its 1996-2000 bear.
A few weeks ago we posited that gold stocks could hold the recent lows and
perhaps form a huge double bottom. That is now highly unlikely as the sector
sold off aggressively when Gold lost $1200. The HUI, trading around 160 has
support at 150 to 160. Like Gold it is not yet extremely oversold in the near
term sense and lacks immediate downside support. The indicators shown on the
chart have much further to go before they reach the extremes seen in 2000,
2008 and 2013. Traders and investors need to be aware of the severe downside
potential before a bear market bottom.
Gold bugs should strongly consider using any strength to defend themselves
against the potential downside that lies ahead. Other than at $1080/oz, Gold
does not have strong support until $1000 to $1040/oz. The HUI lacks strong
support below 150. Also, gold miners tend to have severe losses before major
bottoms. During the financial crisis the HUI declined roughly 50% within a
month of its final low. The HUI also declined 34% during the last two months
of its 1996-2000 bear. It's important to note that this is a small sector and
forced selling by a few funds can exacerbate losses. A break below 150 HUI
could get quite ugly but it would ultimately lead to a spectacular V bottom.
