A remarkable event has taken place in the gold and silver markets in the past two days. It didn’t go unnoticed to anyone following these markets. The gold and silver mining shares have been sold off hard. The drop was out of proportion and did not reflect the actions in the stock market nor in the metals. The fact that the miners have been leading bullion up since August, raises the question if this marks a structural shift in the direction of the shares and the metals, or if both assets will start moving separately in the coming weeks and months.
This article explains the answers on these questions based on the gold cycle analysis. It is an excerpt from The Financial Tap, a service specialized in cycle research (for more detailed insights, readers are invited to consider a free 15-day trial). In a nuthsell: the author is worried about the mining shares but is quite bullish on the metals.
What I see developing here on the Gold daily chart is a mini bull flag caused by heavy speculative retail selling being soaked up by smart money adding to their positions. The Cycle is still very young (Day 8) and Gold is just $9 off its Cycle high’s, there is absolutely no reason for concern from this Cycle, at this point. As long as gold holds its 10 day moving average ($1,715) then the Cycle is still firmly in uptrend and in a bullish state.
I wish I could be as positive on the miners, but they have surprised me here. Hindsight is a perfect tool, but the real explanation here is that I simply put too much weight on the Gold to PM miner’s correlation and the notion that past PM Miners strength would equate to them leading us out of this Gold Cycle. These two assumptions were wrong and we now have a situation where the miners are finding their own ICL with the Equity Cycle, an entire half Cycle behind the Gold Cycle.
But I have expressed my concerns with the miner’s charts before; they never did show the type of retracement and selling pressure that one would equate with an ICL. The decline had been short of 38.2% and the technical indicators were nowhere near oversold levels. Very simply I made the assumption that the amazing strength (8 Week rally) from the miners was the justification to support a mild decline. The miners are a tricky sector to play and I have said many times before that I much prefer to play the metals because I have a much better read on the Cycle.
When we look at the miner’s daily chart, we now have a picture that fits the profile for both a Daily and Weekly Cycle Low. The candle on today’s chart is extremely telling; the sheer drop adequately depicts a day of massive selling and general panic amongst holders of miners.
Within just one session GDX managed to break below a channel trend-line, smash the 38.2% IC retracement, touch the 50% Fibonacci retracement, and fall right through the lower Bollinger Band. The Bollinger Band crash was so extreme that GDX sits a full $1 below the band.
The weekly (Investor Cycle) chart is pretty much a similar picture to the Daily. It was this particular chart that had me worried the most lately as the RSI(5) was nowhere near oversold and the retracement was extremely mild. Today’s action perfectly retraced (to the cent) back to the 50% level and where it closed near the lows of the day.
At this point I don’t know if the miners are done. Typically after such an extreme selling event you will see a significant bounce the following day, but there is just no guarantee. What I would like to see (same for Equities) is for another panic and gap down open tomorrow morning that is reversed by mid-day. Another drop tomorrow morning would likely be met with an exhaustion of sellers and the makings of a significant ICL buying squeeze.
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