Canvas Secondary

Secondary Bottom Coming in Gold Stocks

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 road-map. No one can predict the future. However, we can assess risk, reward and probabilities. We think the current 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.

 

 

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. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.  

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

  • dethray

    its possible we may have a possible high verus trenging a possiblel flat..on our next possible uptrend its possible we may see the a possible trending low than to a possible high going in to a possible downtrend..blah blah blah

  • http://twitter.com/TheDailyGold Jordan Roy-Byrne

    Not sure what your point is….our editorial was definitive and didn’t hedge in any way.

  • Slvrizgold

    Jordan I’m sure you know that not only does the cartel employ manipulative tactics in the markets, but they also employ trolls who lurk on message boards whose purpose is to confuse, ridicule, and demoralize would be PM investors. The Muppets must not be allowed to invest in real money. LOL

  • JD

    Jordan, “dethray” can’t spell, he uses “than” when he should use “then”, and the concept of an apostrophe seems lost on him. I wouldn’t waste a byte of text on him/her.

  • major

    I think there is something to the theory of gold market manipulation by central banks. even though central banks appear to be accumulating gold positions, this could be for the purpose of dumping gold at strategic points to keep it from breaking out of its range when they dont want it to. In the long term there probably isnt enough assets on their side to suppress the gold market indefinitely unless all the banks combined in that effort.

  • Animuseternus

    What did he spell wrong? Seems to me he can spell perfectly. You have problems finding fault in others.

  • http://twitter.com/TheDailyGold Jordan Roy-Byrne

    I’m sorry but the idea of what you wrote is totally ridiculous. Gold and silver miners rise and fall on their own merits. Sure short selling can have a negative impact but there are numerous stocks which have done well while GDX and GDXJ have struggled. The authorities are trying to hold up a broken system. They have much bigger issues to deal with then worrying about gold/silver stocks. Gold and Silver have had terrific bull markets to this point and have been quite strong relative to past bull markets. Ever since I stopped worrying about manipulation I became a wiser and richer investor.

  • Slvrizgold

    You are at odds with Jim Sinclair and some real heavyweights in dismissing the manipulation. For Pete’s sake if they intervene in all the markets (LIBOR, interest rates, treasuries, PPT/general equities etc) what makes you think they aren’t in there trying to destroy mining shares?!? It’s a fact. It all goes to their main purpose —>. Don’t let the muppets have success in PMs. They must keep people in the paper concentration camps! You are doing better because you are learning what attributes the market likes and that is helping your stock picking. That and time and experience.

  • Slvrizgold

    Uhhh, I wouldn’t even say a combined effort can keep the cat in the bag. ALL of the Western central banks are “short of gold.” They only wish they had the reserves they say the do. It’s a nightmare scenario for them, with multiple claims on every oz. There will be a lot of losers who won’t realize the full value of the gold they think they own. Some lucky ones may get a partial payment or delayed payment after long litigation and BK unravelings. If TSHTF for real they will be screwed blued and tattoed. Never forget bankers practice FRACTIONAL reserves and not just the paper but the gold too!

  • TheDailyGold

    Certainly Sinclair and others know WAY MORE than I do. I never dispute that. I only prefer to focus on my own research and making money. The manipulation stuff takes away from that. It’s a sideshow. Don’t blame manipulation when you lose money or pick a bad stock. That is what I dislike. Make it beneficial and not a sideshow.

  • MD

    While I am learning, I would like to add that one reason for Silver not passing through $50+ was that the “Margin” for future traders was increased by a huge percentage. I witnessed that the day after event, Silver began to decline. I do not say if we can call “Margin Increase” a “Manipulation”. But my feeling is that it was also a major effect, besides sentiment and other factors…

  • TheDailyGold

    Margins were recently lowered……does that mean the exchange is corrupt or is just trying to regulate the market. If what they did earlier is manipulation then this is also manipulation and it actually helps the longs. You never hear the fanatical crowd point out how it sometimes goes both ways.

  • pmg

    GDXJ will give you a triple and more, there is pain and that will end. Big sharks eat little fish.