A month ago we noted that the gold stocks were headed lower and to a potential
double bottom that would create another great buying opportunity. After
seven straight weeks of price declines, the gold stocks rebounded last week
and are off to a good start this week. We can't be sure if a double bottom
or some complex head and shoulders pattern is developing. Regardless of the
specific pattern, a bottom seems to be developing and another great buying
opportunity could be at hand.
The weekly chart below shows GDX, GDXJ and SIL. We've already noted the clear
resistance at GDXJ $51 and GDX $31. It appears these markets have at least
a few more months of bottoming activity ahead before they can push through
that resistance. However, there is near-term upside to be had if the market
can rally to that resistance. Meanwhile, the silver stocks as represented by
SIL continue to look the strongest. It had the strongest summer rally and it
has made a true higher low already.
If we zoom in on GDX we see a few additional positives that bode well for
the sector. The three indicators at the bottom are breadth indicators. Breadth
can lead price at key turning points. The bullish percent index, smoothed advance
decline line and new highs minus new lows indicators are all in a much stronger
position compared to the summer bottom. This suggests internal strength is
building.
Furthermore, our favorite chart (of course) by itself makes a very strong
case. The worst bear markets in gold stocks are 66%-68%. Only one (1980-1982)
exceeded that. At the summer low, the gold stocks were down 67%. Furthermore,
the three bears that lasted longer (2,3,4) were, at this point in the bear
market less oversold than the current bear.
Getting back to the title question, I'm not sure if the gold shares are developing
a double bottom or a complex inverse head and shoulders bottom. Double bottoms
typically explode off the second bottom and we haven't really seen that yet.
However, that doesn't invalidate that the market is tracing out some type of
major bottom. The shares are six months into this bottoming pattern. If GDX
and GDXJ reach resistance in December and breakout in January that amounts
to nine months of bottoming. The longer the base is, the greater the eventual
breakout. For example, GDXJ upon breaking past $51 would have a measured breakout
target of ~$70. That is 77% upside from here.
As we've noted in the past, cyclical advances in a bull market average roughly
50% in the first four months and roughly 70% in the first seven months. I also
looked at the rebounds from the 2000, 2005 and 2008 bottoms in the Tocqueville
Gold Fund, one of the best gold stock funds in my opinion. Over those three
periods it averaged a 158% rebound in the first 13 months. Past performance
in any market is certainly no indication of future performance but it provides
a guide to frame our expectations around. It also implies that patience will
be rewarded. As this bottoming process in precious metals moves to its final
stages, readers are advised to identify the companies with the best fundamentals
and growth potential that are showing relative strength. Focus on the leaders
and avoid the laggards.
Good Luck!
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to lead this new bull market, we
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