I would like to start with an observation from one of my
readers, as I believe it's a good way to show the distinction
between tools that help you spot what direction the market is about
to move and those that are better suited to time the exact reversal
point, which is - in current circumstances - the final bottom in
gold, silver, and the whole precious metals sector:
"One thing that I do is to look for price divergence with RSI
and MACD and that is evident in the charts. Price has hit a lower
low and RSI and MACD have hit a higher high/low. To me, that
indicates a possible good time to buy GDX, GDXJ and mining stocks.
This is a volatile time so it would be difficult to hold through
this period. Also $BPGDM is at zero and can't go any lower."
There are divergences in numerous indicators now -- such as RSI and
MACD -- on numerous precious metals-related indices and for
individual mining companies. This, however, has been the case for
some time. For instance, on the
Market Vectors Gold Miners ETF
(NYSEARCA:GDX) chart, you can see that the early April low was
accompanied by a higher low in the RSI indicator, and preceded by a
move higher in MACD. The early March bottom was also accompanied by
a higher low in the RSI indicator.
The point is that divergences are good at showing that a given move
may be running out of steam, but are not that good when it comes to
determining whether the bottom is in or not. With a reverse
parabola in gold and a long-term cyclical turning point (which I
wrote about in my
), we are quite certain that the end of the decline is near, and
that's all that the divergences confirm. They don't suggest whether
or not the bottom is already in.
The Gold Miners Bullish Percent Index was indeed at the 0 level,
and it couldn't go any lower (it's a bit higher today). But miners
can. This index was at 0 in 2008 when the final bottom was formed.
However, that's just a one-time event. It has some predictive
power, but it's not all that strong as it's not a tendency.
Statistically, we would have to see about 30 cases or more to speak
of an existing relationship. But putting statistics aside, we would
have to see at least a few cases with the same or similar outcome
to say that this could be a tendency. Consequently, while the Gold
Miners Bullish Percent Index being at 0 is a contrarian bullish
factor, we think that other methods of analysis are more important
Having briefly discussed some of the tools to time the final
bottom, let's see such tools in action. Let's move on to today's
chart section with the analysis of the silver market.
We will start with the very long-term chart. (Charts courtesy of
Click to enlarge
In this chart, we saw particular intraweek volatility but prices
overall are not much higher, increasing by just $0.25. The week was
pretty much flat and very little changed with respect to price or
Getting a closer look at this chart shows further similarities with
the declines of 2008. We saw a three-week consolidation period
after the initial plunge before prices moved lower once again. Note
how silver moved lower back then after initially correcting and
closed the week close to the previous local low that ended the
previous sharp decline. This is about where we are right now.
Based on weekly closing prices, we already have a breakdown below
the early April low, which is another confirmation of the
similarity between now and 2008. The self-similarity now suggests
increased volatility and a big decline ahead.
Now, let's turn to silver:gold ratio as it is yet another tool that
- thanks to self-similarities - helps us time the upcoming bottom.
Click to enlarge
We saw no significant underperformance of silver this week. The
ratio has pretty much traded sideways for several weeks now.
Although there was a bit of interweek underperformance, it is much
less visible than what we would expect based on the declines seen
in 2008. The implication is that the final bottom is probably not
In the short-term silver ETF chart, once again we see that prices
moved higher early in the week; this move was strongly invalidated
on Wednesday with volume levels nearly as high as Monday and
Tuesday combined. Prices did move higher on Thursday, but volume
levels were pretty much average -- they were actually a bit weak if
compared to volume levels of the past week, and less than
one-fourth of what they were the previous day, so the move to the
upside did little to change the overall outlook here.
Summing up, the situation in the silver market does not look all
that bullish. The cyclical turning point suggests a bottom in a
week or so, but my firm feels a need to see this confirmed by other
markets. Placing our trust in this tool alone does not seem
sufficient at this time. Even though we see divergences between
many indices -- and particular mining stocks and main technical
indicators -- they only support the claim that the final bottom is
about to form, but give no direct clues as to when exactly it is
going to be formed. Here, the self-similar patterns seem more
reliable and the best idea in our opinion is to wait for more
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