Precious metal miners have seen, on average, a 16% drop from their April highs. Some, like the silver miners, have seen a greater correction. Right now, the GDX appears to be putting in a short-term bottom. The question stands whether this will be a lasting bottom and a step towards breaking out of the consolidation since November 2010 as miners have done over and over since 2002. Let’s take a look at some of the drivers effecting prices, fundamentally and technically.
Starting with currencies, the euro and the U.S. dollar have consolidated since last week’s article. These two are the key in leading the stock and commodity markets higher or lower. Looking at the specifics, it seems that the 50-day moving average is blocking any counter move in the currencies – supporting the U.S. dollar price above 75.09 and suppressing the euro below 1.433. As I write, both of these prices are being tested. The chart below shows the euro on a daily (left) and a 30-min chart (right) to look at some of the technical issues – focusing on price. A couple of things to note since our last look at the euro:
- As I wrote last week, a rising trend broke on May 6th.
- A basing/consolidation pattern has been taking place since May 12th with a higher low on May 17th.
- As the euro is staging a rally, there are multiple resistance zones to discuss starting off with the 50-day moving average and two areas of congestion (yellow boxes) that should serve as resistance on initial contact. These will need to be watched closely.
Euro daily and 30-minute charts (click to enlarge)
Because the euro is 57.6% of the U.S. dollar index, the chart of the U.S. dollar is almost a mirror image of the euro. Here too, we see that the 50-day moving average is supporting the U.S. dollar. A breakdown here would categorize the break above the 50-day moving average as a whipsaw event.
So the euro was up, and the dollar was down today. What happened to commodities? They fell. Commodities have been very “whippy” since the euro dropped on May 5th due to the ECB pause in rates and May 6th due to the rumor Greece would leave the Euro zone. Silver has been consolidating between and as traders play the volatility, in and out. Crude Oil has been whippy, trading between and 2 on the July contract for west Texas crude since the May 5-6th decline. July copper futures dropped below key support on May 5th and have since retested the old support. Today, copper is below that level again on a drop in the leading economic indicator number from the Conference Board this morning. Price also has to contend with the short-term, 20-day moving average at .11 today.
Precious Metal Miners
I think that, like many of our readers and clients, I’ve been asking myself “is this a bottom in precious metals?” I think the answer is that this is a trading bottom, but I’m loathe to say, “Backup the truck” because of the unsettling macro picture that could send the U.S. dollar higher if issues aren’t resolved correctly. These issues include:
- Will Greece and Ireland get the next tranche in bailout or will they restructure their debt?
- What happens to the markets after the Federal Reserve begins removing stimulus (QE2.0 ends)?
- Will Trichet resume rate hikes at the ECB in June?
- How will continued uprisings in the Middle East play out with oil?
These questions raise a lot of uncertainty that didn’t exist in January during the last mining stock correction. Likewise, I don’t think the recent correction can fairly be identified with the bottom in January as circumstances have diverged. Another item that’s different today than in January is the degree of margin hikes by regulators. I think it’s important to continue to look at the miners because of capital controls being exercised in the futures markets. I think this will cause a lot of retail players in futures to reconsider the alternatives found in mining companies.
Putting the fundamentals aside for now, I do mainly work in technical analysis. The basic idea is that we have a secular bull market in commodities and commodity stocks. As such, the bull market should “behave” in a bullish manner and if it ever begins to not “behave” in a bullish manner, then reductions in positions are warranted. The other reason to reduce positions is when valuations are stretched and prices have risen “too high”. I discussed this particular issue as it surfaced in Silver on April 21st in “Bulls, Do Not Lower Your Guard”. In giving precious metals the benefit of the doubt here after a 16% correction, there are some patterns and price levels to discuss as I monitor precious metal stocks’ price behavior.
#1 Precious metal stocks are near support in a consolidation zone
The GDX has been at support for a week now and a bounce here was overdue. We’ve been in a trading range since November and we’re now at the bottom of that trading range. From a trading prospective, risk is low buying at the bottom of a trading range and stopping out if price breaks support. That’s why I’m bullish here short-term.
# 2 The technical support isn’t as strong as it was in January
Volume on the GDX spiked when it broke through the 200-DMA (distribution). It’s been steadily elevated here, but nothing has approached the volume characteristics (climactic) one would expect to see in a typical 30 percent correction in precious metal miners like we have seen at least once a year. Basically, the January bottom was in a lot better shape than the current bottom when in January the miner index held above the 200-day moving average on very large volume (hinting at accumulation).
#3 Hurdles on the way up. The main addition here is the 200-day moving average.
On the way up from support, there are more hurdles present than at the same price level in January. In particular, there is a confluence of resistance near
- We have the 200-day moving average to contend with at .38 Thursday
- Area of congestion at (red box below)
- 38.2% retracement of the decline near .60 (see below)
- 20-day moving average moving down through .81 where it closed today.
#4 A halt to a metals advance at wouldn’t be the end to this rally.
Should the likely occur, in a correction between and .60, the potential exists for demand to enter in early; and thus, for a higher low on the next move down above the recent breakout near the .24-55.46 zone. Such a higher low would form the basis for a short-term trend reversal, and not just a trading bounce in precious metal mining stocks.
#5 Focusing on the long-term trend
Markets move in different timing cycles, from the secular trend to the minute to minute trend. The secular trend in precious metal mining stocks is up. The long-term trend on mining stocks is sideways. The intermediate trend turned down in April. The short-term trend is also down with a potential reversal in the cards. The trading trend is up with a break above the last few session highs near .46 on the GDX gold miners index.
Looking in particular at the long-term trend, which has been sideways since November, we are at a critical inflection point in which a break below the January correction would confirm the long-term trend has turned down. It would also serve a major blow to the gold bull market, technically, in my opinion based on the initial item I discussed: behavior.
One such behavior is that bullish breakouts should hold. Such a breakout took place in the HUI gold bugs index last year when the price rose clear above 500. As you can see from the chart below, this was an area that has plagued the gold bug index since the 2008 top. Well, we broke above that late last year and it has held ever since, including during the January correction. A break below 500 would be a severe blow, with a downside target of 384 (double top target). If 500 holds, there is a mega chart pattern that formed and has already completed. The retest of the pattern near the 500 zone needs to hold for this pattern to continue to exist.
I’ve already identified the negative scenario, should the HUI continue to correct past the January low; that of a double top price pattern with a 384 target, (a 36% decline from the April top near 600). Let’s talk about the upside targets should the bullish secular trend reassert itself here. Looking back over the past nine years, consolidations like the one we’re experiencing, have served to pace the bullish advance, releasing over-optimism and resetting the trend. Once broken to the upside, like a spring, they have released tremendous bullish momentum. I can remember writing about the very same subject to clients during such periods between 2004 and 2006, as well as between 2006 and 2007 (see yellow price patterns below). Well, a mega pattern was created in the 2008 collapse and was completed last year when the gold bug index rose above 500. The target for the pattern is an upside move to 850. If we break below the 500 zone (two orange bars below) then this pattern will have been nullified and like the 2008 correction, precious metal miners will suffer a severe blow. Fundamentally, if the sovereign debt crisis unravels in Europe, I think the downside scenario could take place and completely throw the inflationists off as the world gets sent through a second financial crisis in three years.
Conclusion
We’re at an inflection point. As the chart above shows, this is a critical level for the bulls and bears in precious metals. It’s highly dependent upon fundamental issues. I don’t think there’s justification to back up the truck and load up on precious metals here, there’s enough risk to give me pause. 2008 was not a friendly environment to be long precious metals and precious metal stocks. The 16 percent correction we’ve seen thus far is a baby correction in precious metals. Typically, we see a 30 percent decline at least once a year. That might be why I don’t see the puked out technical indications I’d typically see at a bottom for me to say there’s a high probability that a low has been put in here. I continue to watch the credit default swaps in Europe and read the news daily to identify fundamental catalysts. There’s still too much uncertainty to say, the bottom is in. In closing, as I typically have shown, here are the credit default swaps on the peripheral European nations that continue to have economic hardships and whose debt is becoming expensive to refinance.
