Let's dive right into charts and get started to see where the Gold and Silver Sector stand this week.
GDX Weekly Time Frame:
After completing a W bottom earlier in the year, the Gold stocks have just come off one of the best multi-week rallies since the 2008 bottom. They are currently consolidating their gains due to being very overbought on the daily and the weekly charts. (Nothing goes straight up forever.) What we are currently seeing in the miners is very bullish action. As they consolidate, the volume continues to tapper off. This is exactly the type of movement we want to see continue over the next couple weeks. As we show below on our HUI daily chart comparison, I suspect that the Gold Stocks will continue to correct/consolidate through the end of this month. The next chart provides monthly average returns for both gold and gold stocks. (Source: Bloomberg)
As shown above, October has historically been a down month for both gold and the miners. I do not expect much from either for the rest of this month.
GDX Daily Time Frame:
Taking a look at the daily chart, you can see the same bullish action we have had over the last couple months but momentum has clearly been down via the MACD for a couple weeks now. The most objective place to add to long positions would be on a correction back to previous resistance around 48. This area is also the neckline from the previous megaphone topping formation. If we are going to continue higher over the coming months, this zone should act as major support. Also, notice that we recently got a "Golden Cross" with the 50 and 200ma. Once this consolidation is over, we should see a continuation of this trend and a breakout to the upside. The real question is, where and when does this correction/consolidation end? I outline 2 scenarios on the HUI daily chart below.
GDX 60 Minute Time Frame:
Let's now move from the daily chart down to the 60 minute time frame. The GDX has only slightly broke its uptrend that has been in place since the end of July. Should it break down in any meaningful way, I would expect that the GDX will test out the 48 zone which is also the 50% retracement of the entire 2 month uptrend.
On the chart above, I have provided a comparison of the HUI (Gold Bugs Index) from the fall of 2005 verses now. I believe we should see a very similar outcome going forward. Notice how on both charts we had significant tops in November/December of the prior years. Also, take note that both charts made significant bottoms in May. From each of the May bottoms, the gold stocks put in major rallies and became overbought going into the end of September. For weeks, we have been expecting the gold stocks would put in a short term top and consolidate its most recent gains. I continue to believe that this consolidation will last through the end of this month and into the beginning of November. If you look back at the 2005 chart, that is exactly the action that took place.
Now let's look a the potential scenarios I believe are currently on the table for the gold stocks. (Both of which are bullish.) Unless the gold stocks breakdown from the neckline, the bearish scenarios are off the table at this point. Scenario A: If "A" should happen, we should have small bounce very soon. I wouldn't expect any meaningful gains in the short term, but its something to watch going foward. Scenario B: This scenario is my preferred option. I'd like to see a quick wipe out back to the 460 zone on the HUI (this corresponds with the 48 level on the GDX). Not only would this get rid of any of the weak hands, but this would also present us with a very good risk to reward entry on new positions.
What more can I say about this chart? Gold has been very positive. Currently with gold up against resistance I would expect a short term correction, possibly back to the 38% retracement on the Fib levels. Any correction should be bought!
Like gold, silver's RSI levels were also very elevated and overbought. Silver is currently trading within a sideways flag pattern. Should it break down from this level, look for some support around the 50 - 200 ma. This would correlate to around 30-31 on the SLV.
US Dollar Index:
After breaking down from the uptrend over the summer, the USD is currently putting in a counter trend rally. Once this rally finishes i would expect gold and the gold stocks to continue upwards. Notice how I my time scenario ties right in with the current dollar rally. Look for this rally to end around the beginning of November.
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Canadian Venture Exchange
Even though our moving averages recently gave a buy signal, I still believe that we wont see much movement until December / January. This is because of the Canadian Tax loss Selling season. Canadians can sell their equity at a loss and write that off against gains going back 3 years. We should see a significant pop once Tax Loss Season is over and traders come back to the market to buy their positions. Look to add to quality juniors during this time period when others are selling. At least that is what I will be doing personally. The next cross to the upside is where we want to be long the junior market. With that said, I would only be purchasing companies with quality projects and ones that have the cash to move them forward.
- Weekly charts are bullish.
- The GDX is currently in a trading range between $51 and $55. Short Term cautious. Look to buy the pullback around 48.
- The GLD; Short Term overbought but likely to trend higher into the end of the year.
- The SLV; Short Term overbought but likely to trend higher into the end of the year.
- The USD dollar is short term bullish for now.
Until next week, so please stay tuned.