Last week we concluded:
As long as the gold stocks continue to hold support for another week
or two then the near term outlook is bullish. A bull flag is a consolidation
pattern that separates two strong moves. It could be developing in the
miners. There is logical reason to be cautious if not bearish at this point.
The metals look okay at best while the miners remain somewhat overbought.
However, the action in the miners, if it continues for another few weeks
is telling us what could be ahead.
The strength in the miners continues to surprise as the majority of pundits
look for any reason for a pullback in the face of very bullish price action.
The gold miners are now breaking out and Gold is likely to follow.
The weekly candle charts of GDXJ and GDX are shown below along with their
80-week moving averages. Note that the miners advanced for six weeks and their
bullish consolidation began during that sixth week in late February. This week
marks the fifth week since the previous advance. The miners are a little overbought
here but not as much as they were five weeks ago. Moreover, we should note
that overbought can become very overbought and extremely overbought. The immediate
upside targets are GDXJ $33 and GDX $22.50 and it is possible this move has
even greater upside.
Turning to Gold, we see that it has stabilized in the mid $1200s within a
larger range of $1210 to $1270/oz. With the miners breaking to the upside,
Gold is very likely to follow to the upside. The current net speculative position
of 43% is relatively high but we should note that from 2001 to 2012 it often
peaked at 50% to 60%. Gold is weaker than the miners and may require a bit
more consolidation. Nevertheless, weekly closes above $1262/oz and $1300/oz
could send Gold on its way to $1400/oz.
A move in Gold to $1400/oz would fall in line with history. In the chart below
we compare the current rebound in Gold to its rebounds following major lows
in 1976 and 2008. If Gold rallies to $1400/oz in the next few months then its
recovery would be in line with those previous two recoveries.
After consolidating in bullish fashion for a good five weeks the miners appear
to be starting their next leg higher and this should eventually propel Gold
higher. The toughest time to buy is after a market has already had a strong
rebound, following a nasty bear market. Investors and pundits alike subconsciously
refuse to believe a major change has taken place. Gold stocks endured the worst
bear market in 90 years. Of course there will be fear that it could reassert
itself at any time. However, the action of the market is clear. Gold stocks
are breaking out and could be headed much higher in the near term.
