In the recent months several financial institutions have bankrupted and now we witnessed the historical $700 billion bailout. The stock market has been falling for almost a year now and it seems that wherever we turn, we see another essay about ‘crisis’, ‘recession’ or ‘depression’. Many readers have asked us about our view on the general stock market and how its performance influences the precious metals market. In this essay we are going to answer these questions.
We are just approaching the anniversary of the last year’s top and according to William Gann, the anniversary dates should be especially taken into account when looking for a trend reversal. Therefore we will first take a look at the chart of the S&P Index to look for any sings that a bottom may be forming. All charts are courtesy of www.stockcharts.com.
The chart above seems to confirm the thesis that the general stock market may be bottoming right now, if the bottom is not already in place. The S&P Index is a little below the support line, but the breakdown has not been verified, meaning that it did not close below this line for three consecutive days. If it fails to do so, we might see a strong correction here. According to the lower border of the short-term trend channel (dashed) we have just reached the support and even if the stock market falls further in the long run, a corrective upswing here is likely. The price levels that we get by using the Phi (1.618) number in the long and in the short run also provide us with a very similar support levels. Here’s a link to one of our previous commentaries, where we have successfully used (and explained) the latter technique.
In sum, we believe that at least a temporary turnaround in the general stock market is right around the corner. We could get a several days of testing Friday’s close or we could get one last spike on high volume, but either way we think that a few weeks or even several days from today, we will have higher values of the S&P Index, than we have today.
This has very important implications for the precious metals stocks, especially if one takes into the account their recent performance relative to other sectors.
The HUI / SPX ratio show the abovementioned relative performance. Since a few weeks precious metals stocks outperformed the general stock market, meaning that they were among the strongest sectors in the market. It seems hard to believe given the fact that they are almost 50% below their previous high, but please note that the HUI Index did not fall to a new low, and the SPX Index did. Anyway, if the stock market goes up and this ratio continues to rise, then the precious metals stocks will gain from both of these factors.
This is not likely to be done without an increase in the price of the underlying metals themselves. Before presenting you the gold chart, let’s take a quick look at the U.S. Dollar.
The U.S. Dollar Index rallied to its previous highs, and it has just formed a 'doji' candlestick – suggesting a reversal. The important fact here is that it is taking place at the 80 level, which served as, multi-year support level and has now turned into strong resistance. With so much money being created and thrown at the market (especially recently) it is really doubtful that this rally is justified from the fundamental point of view. Thus, we view the rally as simple correction after a breakdown, which took USD to the 71 level. The decline was too fast and too deep, so we have a correction – that’s it. As such it is vulnerable to strong resistance levels, such as the one it is currently trying to break. Although it is not certain, we think it is highly probable that the buck will not get much higher in the future, than it is today.
As USD got a little past its previous high, one might expect gold to be around its recent lows...
It is not.
In fact, gold is relatively far from its recent lows – about $100 higher. Silver did not break through its previous lows either. The performance of both precious metals suggests that further rise in the USD would have a limited impact on their price, whereas a decline in the USD should trigger a sizable rally.
Summing up, we believe we are experiencing another buying opportunity in the precious metals stocks. Gold stocks act strongly relative to other sectors and gold itself is holding very well despite recent strength in the USD. If the general stock market puts a bottom here, then gold stocks should greatly benefit from this situation.
Of course the market might prove us wrong, as nobody can be right 100% of the time. Should our view on the market situation change substantially, we will send an update to our registered Users along with suggestions on how to take advantage of it. Register today to make sure you won’t miss this free, but valuable information. You’ll also gain access to our Tools section. Registration is free and you may unregister anytime.
P. Radomski
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