Thursday, 28 August 2014

The bulls attempt an upside reversal -- can it stick?

Gold is up more than $9, and the miners are up in sympathy. The possible head and shoulders neckline I have been monitoring in the GDXJ has broken tentatively to the upside, threatening the validity of that possible topping pattern.

The bulls are making an impressive stand, but they have more work to do to increase the odds their charge will stick.

In this bear market, the gold miner ETF has had a nasty habit of making a hard back-test of its 50-day moving average before resuming a decline:

Sometimes these backtests appear to be budding upside breakouts.

The GDX's 50-day moving average is being back-tested with vigour this morning (I'm writing well before the stock market close).

September tends to be a seasonally strong month for gold, which adds a wrinkle to this technical situation to be sure.

Wednesday, 27 August 2014

Back-testing continues as bulls keep up the pressure

I continue to watch a possible topping formation building in the junior mining index GDXJ. As I write, the apparent back-testing process appears to be continuing:

The reason I am focusing on the juniors is they tend to lead the precious metals sector up and down.

As I write before the close, gold just can't seem to get over and hold above its 200-day moving average, and this is giving the miners some pause after yesterday's pop in the mining indexes. Gold is currently trading below all its key moving averages: the 30-day, 50-day, 200-day, and 300-day.

That gold is back-testing its 200-day moving average, and GDXJ is back-testing a possible topping formation does not seem coincidental.

Interestingly, gold has been struggling long enough to turn its point-and figure-charts bearish. The PF projection for gold is $1230, barring a decent upside reversal which would negate the set-up.

I'm not a big fan of point and figure charts in general because they are no good for timing exit and entry points. I find they are too often behind the curve -- these types of charts are often painfully slow to pick up a trend reversal and provide an updated projection. However, I do check them from time to time to see what the projections are.

If gold should bust out above its 200-day moving average in a sustained way with conviction, I would expect the back-testing of overhead resistance in the mining indexes could give way to another rally. The bears remain in control at the moment, but anything can happen in the markets, and one needs to keep alive to the possibilities. On the other hand, the longer gold stays below its key moving averages, the more nervous the bulls will become.

There is a big fight here going on under the surface between bulls and bears, and to my eyes the fight seems pretty balanced at the moment looking only at my charting indicators. This may be yet another critical juncture.

When I look at the whole picture -- the rising dollar, sinking Euro, weak commodity sector, surging stock market etc., -- I continue to think the bears have the edge. But, of course, the market could care less what I think.

Looking at various gold and silver miners individually, it's a really mixed bag -- some are super strong, near all-time highs, others are in the trash can. I've rarely seen such a mixed up, muddy situation.

The unusual strength in the mining indexes overall though is really the wildcard in the precious metals sector right now. This is a big factor in creating and maintaining the excitement and conviction of the bulls. After all "everyone knows" the miners lead the action in the metals.

My thesis for the time being is that the strength in the miners may be a false signal. That's not to say the buying isn't real -- it may simply be a case of misplaced investor enthusiasm.

What I find is that at key turns in the precious metals sector, there is often a false signal or two that keeps hope alive.

For example, just as the second leg of this precious metals bear market was about to take hold, physical gold demand was exceedingly strong. This was reflected by record physical gold holdings by the big gold ETF GLD at the time. The signs of strong physical demand at the time, while real, were a very convincing bullish, yet ultimately false, signal. It was a case of misplaced investor enthusiasm. Investors were piling in after the top, a common occurrence.

My hunch is that something similar may be happening that may explain the action in the miners.

A thought: as the second leg of the precious metals bear market was getting ready to unfold, physical gold demand was high and rising, while the miners were unusually weak. The weakness in the miners turned out to be the tell. This time, physical demand is largely absent, while the miners are relatively strong.

Could it be that weak physical demand for gold is the tell this time around?

Tuesday, 26 August 2014

Those toppy-looking juniors

Here's a look a the junior gold mining ETF, GDXJ.

I see a possible head and shoulders top that has broken under the neckline and is back-testing the breakdown from below.

There are no guarantees in the markets, or in chart patterns. Personally, I would have like to have seen more of a breakdown prior to a backtest, but the market doesn't listen to me. The market action of late seems almost designed to unnerve and mislead investors as much as possible.

What's interesting about the possible head and shoulders top in the chart in the chart above is it is projecting a price target around where that uptrend line lies. It's almost a little too neat, and too obvious... but sometimes that's how it is. Time will tell.


Gold is bouncing Tuesday morning from oversold levels on the daily chart, not entirely unexpected.

In yesterday's action, the gold mining ETF GDX broke down through a stealth support and resistance rail. That breakdown looks like it may be being back-tested:

This is the precious metals sector for you. Gold may be back-testing its 200-day moving average which is sitting around the $1285 area. 

The tension among bulls and bears is high, and for good reason. Gold and silver are struggling, but the so-called "strong season" for gold tends to get in gear in late August or early September.  Many bulls are likely thinking if they can just hang in a little longer, they will see at least a short-term payday, or something more. Many bears likely think if they just hang in a little longer, they may see a critical breakdown before some seasonal strength kicks in. 

Even though I am bearish, I am prepared for the potential for some volatility ahead. 

An observation: The latest inventory report for the gold ETF GLD shows its gold holdings continue to slip at 797.09 tonnes. This is below the level that closed out 2013. I view this trend as suggesting that strong hands may be using rallies to sell what were longer-term gold holdings. 

The lack of build in the GLD vault holdings should be a concern for the bulls. It suggests the appetite may be waning for long-term "buy-and hold" gold ownership. 

Monday, 25 August 2014

Epic topping action in the miners?

The recent topping action in the gold mining ETF GDX has been a doozy.

What has occurred is two topping formations on the same neckline, separated by a false breakdown.

It's a doozy of a set-up. One that tested the resolve of bears and bulls at the same time.

Readers who felt unsettled by the recent market action in the precious metals complex had good reason -- the recent action flummoxed even some of the most seasoned and experienced market veterans.

In gold, the big battle is now taking place just above the critical $1270-75 support zone shown in a previous post. The gold miner ETF GDX is now flirting with a possible secondary support line in what appears to be an epic, drawn-out topping action.

Gold is getting oversold on the daily chart, but not the weekly.

The whole story right now is whether gold hold above $1270-75 -- or not.

IF $1270-75 gives way with conviction my models are telling me the next leg of the precious metals bear market will likely be underway, past the point of no return. The stall in gold here should be no surprise given the importance of this support zone.

As for the miners, that possible island reversal in the GDX noted in the previous post appears to be playing out (so far) with the continuing move down as I write. Island reversal patterns are considered one of the more unreliable patterns. But when they play out successfully, watch out! They can be the signal of sustained move.

In GDX, today's action has taken the price of GDX below the chandelier's exit, a trailing stop indicator that some traders use to manage risk, and exit points. No indicator is flawless, of course, but today's action is signalling to longs who use the chandelier exit, to think about getting out:

At this time, barring a miracle, it looks to me like the next leg down in the bear market appears almost inevitable, and I have been positioned accordingly. As such, the key question is -- where is the bottom of the next leg down likely to be found?

In future posts, I'll examine this question and provide some food for thought. I have little doubt that the market will work very hard to fool the majority of investors about its intentions, just as it appears to have done with the recent, devious topping action in the precious metals complex.

As such, I fully expect most investors -- including many veteran investors -- to miss the bottom. I don't intend to be one of them.

Friday, 22 August 2014

Those plucky miner bulls

I gotta give it to those miner bulls. They've got pluck. They keep hanging on.

If I were bullish (I'm not), I freely admit I would not have their courage.

Why? The gold mining ETF GDX has three strong bearish signals back to back.

First, there is the evening star candlestick pattern at the most recent top. This then morphed into a small head and shoulders top. With the gap breakdown yesterday, that morphed into an island reversal.

Now, to be sure, there are no guarantees in chart patterns or in the market. But that kind of back-to-back bearish signalling has to be taken seriously.

Yet the miner bulls appear unperturbed today. Sure, gold was attempting to stabilize above that critical $1270-75 support zone I mentioned in the previous post, and the miners attempted to stabilize in sympathy. I just can't believe the complacency in the face of that potentially bearish signalling in GDX. Perhaps the bulls think that recent gap needs to be filled. The risk in that line of thinking is that gaps on successful island reversal patterns don't fill.

I view today's action (I'm writing well before the close) as likely back-testing. Time will tell.