This essay is based on the Premium Update posted on April 26th 2009. Visit our archives for more gold & silver articles.

I have summarized my previous essay, by stating that we may be reaching a local low in the precious metals sector. We rallied from that point, so many readers have enquired whether or not the bottom is already in. This essay is dedicated to replying the abovementioned questions.

Generally, there are no convincing evidence that the local bottom is in - yet. Although I have originally expected that we will go a little lower before we would bottom, I can't tell market what to do next. Therefore, I always try to focus on what the market provides me with and tell you what I think about it. Since previous week's rally has not invalidated previously established declining short-term trend line, it should be viewed as a counter-trend rally. Please take a look at the following chart for more details. Charts are courtesy of stockcharts.com.

Last week's rally was really impressive on a day-to-day basis, but when one takes a look at it from a distance it becomes visible that that it has reached a resistance level and stopped right there. This means that it is still a counter-trend rally, and should not make you too excited - yet.

Don't get me wrong here - I'm referring to the short-term trend which is down - I'm still bullish on the precious metals sector in the long run. In fact, not only is the fundamental situation favorable, but our Gold Bottom Indicator has already signaled a long-term buy signal. Please take a look at the chart below for more details.

The above indicator gives a buy signal when it breaks down through the dashed line. As you may see, this has taken place not too long ago. Therefore, as I have informed my Premium Service Subscribers over a week ago, I believe that long-term part of one's capital should now already be invested in the precious metals market.

Given rather high reliability of the above indicator in the long term (you can see the enlarged version on my website in the Charts section), waiting with one's capital to invest in this market may not be a profitable decision. Please note that I'm referring to the long-term investments here - the short-term speculation is a different matter.

Getting back to the short term - much depends on where will the gold market go in the next few days. If we get a breakout on a strong volume and verify the previous trend line as a support (as prices drop modestly and bounce after reaching it) - an immediate surge to $1000 is likely. However, if we bounce off the resistance line, or (even stronger signal) break through it on a low volume and then decline on a strong volume (again, below the trend line), gold could reach the area described in the previous essays - $825 - $860.

The above paragraph explains why did I refer to bottom and top at the same time in the title of this essay.We may be close to a long-term bottom, but at the same time we may have just seen a very temporary top on a very-short-term, daily basis.

The silver market provides us with similar signals:

We have just seen a remarkable, almost $1 move in only 5 trading days, but it has also stopped at the resistance line. Once again, the next few days will most likely serve as a key factor in determining what is more probable in the near future: a rally or another decline.

Moving on to the gold stock sector, we have experienced a substantial move in the last few days, but it doesn't suggest that the bottom is in - yet.

The HUI Index bounced to the 50% retracement level, which is exactly the level that stopped similar temporary upswing at the beginning of March. Therefore, I'm not yet convinced that we will move higher immediately. In my view, this is possible, but not enough to enter a speculative long position here, especially after a few days of sizable gains. In more quantitative terms - the potential profit that one can make during the following rally has decreased (we are higher, so wherever the top might be, we are closer to it today, than we were a week ago. At the same time the chance for further gains has not increased significantly, as what we've seen is still within the "historical norms" for a decline in the PM stock sector. If we break higher we will have even smaller potential profit for this rally, but the probability that the following rally will indeed materialize, would increase significantly.

The analysis of USD Index provides us with additional details.

The above short-term chart may seem bearish, as USD Index has just broken below a short-term trend line. However, I for now I remain skeptical about this breakdown, as it didn't go below the 61.8% Fibonacci retracement level, and it closed below the trend line just for one day. Moreover, the breakdown is visible only on the short-term chart.

From a long-term perspective, this "breakdown" is currently really insignificant. Naturally, this could turn into a serious decline, but it has not happened yet.

Summing up, the precious metals were very strong in the previous week, but that is not enough to convince me that the local bottom is in. On the other hand, the long-term situation looks very favorable and staying completely out of gold and silver does not seem like a good idea.

Of course the market might prove me wrong, as nobody can be right 100% of the time. To make sure that you know my thoughts (including information not mentioned here) on the market as soon as I post them, I suggest signing up for my free mailing list. Sign up today and you'll also get 24 hours of access to the Premium Sections on my website (including tools and charts dedicated to PM investors and speculators). It's free and you may easily unregister anytime.

P. Radomski