After a few false starts this year, the technicals have finally lined up to suggest the time is right to nibble.
Although gold is still languishing below the
$1,300 mark, gold stocks are giving hope to long-suffering bulls. In
fact, technical signs in many places suggest that a decent rally is now
in the cards.
To be sure, there is
plenty of work left to do before we can even think that gold and gold
stocks are heading back up to their 2011 levels. But even so, there is
plenty of room for growth before the comeback runs into serious
resistance.
Back in April, the Market Vectors Gold Miners exchange-traded fund (ticker:
GDX
) seemed to stabilize, and I wrote here that "…the technical
evidence for a new bull market is not yet there. It does appear to be
getting close, however." (See "Getting Technical, "Gold and Silver Are Almost Ready to Rally," April 28.)
At
the time, sentiment was extremely bearish. When the ETF broke down
through chart support in May it became extreme. It was as if everybody
expected the market's bottom to drop out. Calls for gold to tumble
seemed to be everywhere. Indeed, withdrawals from the popular SPDR Gold
Trust ETF (
GLD
) continue even now at a rather fast clip as demand diminishes.
But
to a contrarian technical analyst, this is bullish. If most investors
think gold prices are heading lower and sell their positions, then there
will be no sellers left. Supply dries up, and any spark can get the
market moving higher.
The gold miners
ETF has already started to make that move. After dropping sharply in
mid-May as gold broke down, it immediately stabilized (see Chart 1). In
fact, on-balance volume began to rise, indicating that money was
starting to flow back into the ETF. Within days, the May plunge was
erased.
Chart 1
Market Vectors Gold Miners ETF
In Wednesday's trading, the ETF confirmed its rally by moving nicely above its 200-day moving average.
From
a long-term perspective, we can see a developing bottoming pattern that
some may interpret as an inverted, or upside-down, head-and-shoulders
(see Chart 2). This pattern spans more than one year with its important
lows occurring in June 2013 and December 2013 with last month's bottom
likely being the final low.
Chart 2
Market Vectors Gold Miners ETF, Long Term
I am not so sure a head-and-shoulders
is the proper label, but despite the semantics there are other pieces
in place that suggest the bottom has been made. The most obvious is the
shift in momentum to the bullish side. One indicator, the relative
strength index (RSI), has been sporting higher lows over the past year.
This tells us that the power in the market reverted to bullish hands.
Price moves are somewhat stronger to the upside than to the downside.
We can also see the same pattern and characteristics in the Global X Silver Miners ETF (
SIL
) to add even more confirmation to the mix.
Of course, not every stock in the group offers such good news. But from giant Goldcorp (
GG
) to the much smaller Iamgold (
IAG
) there are plenty of candidates from which to choose.
As
gold stocks are linked with gold itself, let's take a quick big-picture
look at the gold ETF. Starting at the major low set in 2008, the ETF
rallied to 2011 and then retraced roughly 62% of that gain at last
year's lows (see Chart 3). Chart watchers will recognize this as an
approximation of a 61.8% Fibonacci retracement and a level at which
demand often re-emerges.
Chart 3
SPDR Gold Trust ETF
If we move further back in time, last
year's lows also occurred at the 50% retracement of the rally from
2005. While that was not the lowest point of the prior bear market, it
was the low that occurred just before the rally really got moving.
Finally,
last year's lows were also at the measured downside target for the
break of a large triangle pattern seen in 2011 and 2012. Projecting the
height of a pattern down from the breakdown point often yields an
objective for the bears.
With gold
seemingly reaching a solid floor and gold stocks starting to make real
technical progress, it does seem that now is a good time to take a
nibble on the latter.
Again, the proof
for a long-term bull market is not in place, and the gold miner ETF has a
rather strong ceiling above in the $31 area (it closed Wednesday at
$24.77). But the opportunity for profit in the short term seems real.
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