Monday, April 18, 2011

Is It Too Late for the Miners?

*
It has been annoying these past several days to watch gold and silver break to new highs while the miners have seemingly collapsed, unable to even hold up horizontally.  So this got me to wondering - is it too late for the miners to make a big move? After doing some research my findings surprised me, and perhaps they will surprise you too.
*
I have prepared 4 charts of the Amex Gold Bugs Index (HUI).  First we will look at the huge consolidation and rallies of 2006 and 2008, then take a look at our current situation with a weekly and daily chart.
*
Click on any chart to ENLARGE
*
This is a weekly chart of HUI for the 2006 parabolic C wave conclusion. We note that the consolidation phase was 24 months, from the initial break above the consolidation line to the peak of the rally was 22 weeks, and gold appreciated from $430 to $730 during this chart's timeframe.
*
9 or 10 weeks before the final rally began the HUI reached within 8% of the consolidation support line. What followed was a relentless string of green candles to the top, taking the HUI to 49% above its consolidation support line. We also notice that the True Strength Index (TSI) did an excellent job of locating the beginning of the final rally with both a trend line break and ZERO crossover.
*
*
This is a weekly chart of the 2008 parabolic C wave conclusion.  The consolidation period was shorter than that of the 2006 specimen, and came in at 17 months. The HUI bobbed and weaved for 23 weeks after initially clearing the consolidation line before reaching its top.  During this time frame gold appreciated from $730 to $1030.
*
This time around the HUI rally lasted just 4 weeks and curiously, its began it's final launch from a price just 8% above its consolidation line.  When the top came it was 31% higher than the consolidation line.  Clearly the 2006 HUI concluding rally was longer in terms of time, more powerful in terms of % gain, and was preceded by a consolidation period longer than this 2008 example. And once again, the TSI did an admirable job in locating the bottom of the final rally.
*
*
Now we turn to our current HUI weekly chart for 2011. A couple of things are immediately obvious.  First, the consolidation period of this C wave, at 30 months, is massive by comparison to the preceding two charts.  28 weeks have already passed since the consolidation line was initially broken to the upside.
*
Gold has risen from $1030 to $1498 during this chart's timeframe.  But look at where the HUI is in relation to its consolidation line! Today's closing price action brought the HUI to within 8.5% of its enormous consolidation line. Are you thinking what I am thinking? (The previous two HUI consolidations launched from 8% also - apparently what we are seeing now is not unusual at all).
*
Ps - no buy signals on this weekly chart - yet.
*
Finally, let's take a look at the current HUI daily chart. I've marked the TSI buy and sell signals of the past few months.  Currently we are still on a sell signal..... but that just means that the buy signal comes next! Anyway, a final gain rivaling the 2008 4 week performance would take the HUI up over 100 points to around $681.  Something resembling the 2006 C wave conclusion would bring the HUI up 200 points to around $775.  And if the length of the consolidation has any relationship to the size of the final rally, the HUI should surpass $800.
*
So my question was, is it too late for the miners?  And now the answer.  No way!
*

35 comments:

  1. Hi John, a question: in 2011 weekly chart, if I take 12/3/10 and 12/31/10, I get a buy signal at 2/18/11 which resides at zero crossover. At this point, HUI also within 8% above consolidation support line (I take it @ 518.72). Hence, looking from this angle, could this be the final rally? Thanks!

    ReplyDelete
  2. Hi john, are you going to buy back some miners you've sold when buy signal comes?Or jump into just on agq and slv?
    Thanks so much for your work!!

    ReplyDelete
  3. John,

    nice research.

    Q:is the potential gain for silver similar to that of HUI if this projection becomes real?

    ReplyDelete
  4. Guy - that is an interesting question. I just eyeballed the starting location of the HUI final rally on both the 2006 and 2008 chart. In 2006 silver continued to rally 40% past that date. In 2008 silver continued to rally just shy of 20% past that date. This suggests a final silver price in 2011 of between $51 and $60.

    Daniele - Hi. I'm inclined to go the miner route and waiting for the TSI to give me a green light.

    Anon - I gave your idea some thought and just don't see how the party could be over. A final parabolic move is, by definition, a string of green candles leading to an explosive unwinding of the rally. Since breaking above the consolidation line 28 weeks ago the most consecutive weekly green candles has only amounted to 3 and with a 17% gain above the consolidation line, that is hardly parabolic nor has the unwinding been explosive. Surely, after a 30 month consolidation this rally will amount to better than that.

    ReplyDelete
  5. Thanks John
    Lets not ignore the seasonality effect here. In both 2006 & 2008 the moves came in Mar & Apr, before falling back in May. So if there's going to be a miner move, it has less than a handful of weeks in which to get going.

    ReplyDelete
  6. GREAT historical and comparative analysis, John! Thanks very much for sharing it with us.

    All the best.

    ReplyDelete
  7. Insofar as part charts predict future price action it looks good. We seem to have a black swan infestation, however.

    ReplyDelete
  8. John,

    Again great job! Thank you for your efforts.

    I get that you expect a breakout soon. Do you expect a push lower before the big move higher?

    ReplyDelete
  9. $$$ - yes, I expect price to push lower first before the big move.

    ReplyDelete
  10. HUI doesn't trade. What would be a good trading vehicle to catch this expected run in HUI? GDX?

    ReplyDelete
  11. John,

    Gary is calling a possible runaway move, are you agreeing, looking at the dollar collapse?

    ReplyDelete
  12. @ guy

    Who is Gary? Sorry, I do not know...

    ReplyDelete
  13. anonymous,
    check out goldscents.blogspot.com for some really great stuff. That's Gary's website. He and John are about the best.

    ReplyDelete
  14. Not sure about if that trendline break counts because I don't know if that counts as a trendline but there's definitely a ZERO crossover!

    On the other hand thats an ugly shooting star.

    I guess we'll see which indicator wins tomorrow!

    http://tinypic.com/r/2mml52/7

    ReplyDelete
  15. john are you expecting silver to reach $51-$60 before December or before June?

    ReplyDelete
  16. Hi John,

    I'm not really anonymous, I'm geoffo65 or geoff the brit who sends you private e-mails 'cos he doesn't know how to post on this board etc.etc. -
    but my question to you and to anyone else who wants to answer (although this question I'm sure has been asked before) - what is everybody doing with these pesky miners? Are they hanging in hoping they'll start to show some life, or are you dumping them in favour of SLV, AGQ,DGP and so on?
    Nervous Newbie.

    ReplyDelete
  17. Hi John,
    I am holding a good amount of physical silver, should I hold or should I wait for some more time.
    Thnx

    ReplyDelete
  18. Good question Geoff. I too am a nervous newbie sitting knee deep in miners and am wondering "what the heck???"

    John, I've read some of your articles at Kitco and noticed you hit the beginning of this current run right on the head back in early April. I've been stopping by here several times a week ever since.

    I'm a Canadian and I've noticed that while Gold is doing very well priced in wilting US paper, it has seen a much slower rise this year in other currencies, particularly the currencies of some of the big mining nations like Canada, Australia, South Africa. Aussie dollar price for gold as I write - $1399/oz, Canadian dollar price - $1439/oz. Very little growth in gold since December/10 in these currencies. Could miners be reflecting the slower rise in gold values based in other more stable currencies? A truer, more international reflection of what gold is worth outside of the US dollar? Also factor in bailing investors who are heading to the exits because they're not seeing the returns of the past couple years. Could these items be a factor in the under performance of the mining sector?
    Any thoughts? (Be kind people, I'm relatively new to investing in pm's and I've still much to learn)

    ReplyDelete
  19. Spidey - yes, the HUI made a trend line break yesterday and a ZERO crosover. Yes, that is a buy signal. I have have decided to play this one chess more ahead of the game. It may work, I expect it to work, but there is always the chance I will be wrong.

    The chess move is to anticipate where the TSI (7,4) will be when HUI/GDX make a higher high - presumably soon. From my vantage point it looks like it will create a negative divergence sell signal which means that price is likely to have a final drop. Then the trend line of the TSI from the high of Apr 8 to the top of whereever the TSI gets this time when it makes the negative divergence, becomes the new *trend line to break*.

    Should this play out in agreement with my chess move, I will become a buyer of miners.

    Crashjp - however high silver reaches, it will peak near the end of May or early June, I think.

    Tracy - my wife and I bought silver bullion at about $16. We are in agreement to not sell for a long time - like 5 years or something. But if you want to get out when the getting is good for now, probably sometime in the second half of May would be rather ideal.

    Number Kruncher - your questions are great. Please, no apology needed! To answer, beats me what the answer is. My humble little study of the mining sector shows that the miners really rally in the final month or slightly more of the entire parabolic move of gold and silver. So this current *underperformance* appears to be quite normal. Indeed, about the time that everybody sells their miners in disgust, the rally will begin and everybody chasing to get back in pushes up the price even further.

    Next class is here.

    ReplyDelete
  20. @ Monty

    Thanks, ok I read or heard about Toby Connor, in Kitco I think. But in January or so this year, his prediction were not so accurat, if I remember right. I am too lazy to research now back to January, but since then I basically did not follow him.

    ReplyDelete
  21. Thanks for your insight John. Just in case I also hold my silver for 5 more years, where do you see the price then. Also, how much retracement do you expect after second half of May.

    Thnx in advance.

    ReplyDelete
  22. Tracy - silver has always retraced back down to a previous major consolidation area. In our current 2011 situation that would mean a price of $36 and more likely $32. In 5 years? That is almost scarry to think about.

    Each of these parabolic rises, 2006, 2008 and 2011, are themselves small episodes of a much larger parabolic rise of this secular bull market.

    Try to picture in your mind a 15-17 year parabolic that begins in 2001. We are 10 years into that and silver has already risen from $4 to over $40. Imagine that the greatest acceleration of the parabolic takes place in the final years... which is still in the future.

    Silver, within this consideration, could end up at $1,000 or something just as mind boggling.

    ReplyDelete
  23. Hi John,

    Looking at the daily and 4-hour charts for two stocks in particular, EXK and AG, they are both at the end of a narrowing trading range that started on April 8 and the TSI for both is hovering around 0. Have any thoughts on those two stocks?

    ReplyDelete
  24. rckt - thanks for an interesting question. I have heard of First Majestic many, many times but never knew the ticker symbol. Thank you for that!

    I am in agreement with the observations you have made re: TSI and these two stocks. I guess my answer would depend on the time frame you would like to hold either, and here is what concerns me:

    Silver has been green 7 consecutive days. Previous to now, silver put in a string of 8 green candles before a couple of red candles. Silver's price movement this time around has been more "parabolic" than earlier in the month.

    These two observations wave a yellow flag of caution for me. It would be entirely possible that silver would scream even higher for a day or two this week, only to then make a scarry drop that undoubtedly would have an effect on the silver mining stocks.

    If you have a quick finger on the trigger you may be able make a short term trade work - assuming of course that silver decides to correct when the NYSE is open and that you take your profit and run.

    But if you are looking for an investment to hold well into May then probably either stock will work out just fine.

    I continue to believe that the miners are going to get hit sometime this week and I am trying to patiently wait for a decent opportunity to buy....using the TSI as my guide. I wish us both good luck.

    ReplyDelete
  25. Hi Again John,
    Your friend Gary is suggesting to get out at $50,
    do you still believe I can stay on till second half of May.
    Thanks

    ReplyDelete
  26. Tracy - I own some physical silver and am not going to sell it for a long time. I did own AGQ but sold it a while back. Last fall I projected silver to rise to $46, which is where it was as the end of last week. I am not the slightest bit interested in buying silver at this point - even if it continues higher.

    Each person has to judge their comfort level with risk and accept the consequences.... which is what both Gary and I are doing, individually. I do believe that silver will be the current price or higher beginning the second half of May - but I personally do not feel strongly enough about it to put *my money* on it.

    What I do feel more strongly about is that gold will continue to edge higher for a number of weeks and I will focus my investment efforts in that area.

    I hope my thoughts help you make the right decision for you.

    ReplyDelete
  27. Awesome John, thanks for your insights on this chess game

    ReplyDelete
  28. Number Kruncher - re: underperformance of miners - you may have made some valid points. I'm tending towards the view that many people (like John)expect a pullback is imminent and won't pull the trigger till that happens. Whatever the reason, historically John says they'll take off about a month before the Grand Finale.

    NUGT. Someone was aking about using GDX as a proxy for the HUI. NUGT is a Direxion ETF 2xGDX.
    Hasn't done much so far, not surprising, neither has GDX, but I quite fancy that when I move over from silver to gold. One to pick up after the correction?

    Cheers to all

    ReplyDelete
  29. John- My question is a simple one. There is some scuttlebutt about the U S Gov shorting the miners through hedge funds. Is there any truth to that and if so what might those consequences be ? Thanks JW

    ReplyDelete
  30. JW - thanks for taking the time to write. I have not heard the scuttlebutt, so this is news to me. My hunch is that this rumor is pure nonsense, but that is not a fact - only a hunch. For the life of me I cannot fathom why the US Govt would funnel taxpayer dollars through hedge funds to short mining stocks.

    For one, FED policy has been to create more stock market wealth via its excessive money printing operation. This alleged shorting initiative does not line up with the FED's bigger purpose of creating stock market wealth.

    Second, I don't believe these conspiracy theories anyway, but wouldn't it be more effective to try to hold down gold than the miners? If gold does not rise, the miners would not rise anyway.

    And third, these clowns cannot even agree to raise the debt ceiling so the US Govt does not begin to default on its obligations in another 2-3 weeks. But they *have* found agreement to short mining stocks? Really??

    ReplyDelete
  31. I am all in silver miners SLW CDE PAAS MAG HL SSRI SILVERCORP Silver has moved from 18 to 48 since dec my stocks are going backwards WHY HELP INDESPAIR

    ReplyDelete
  32. Interesting comentary guys. today I dumped all the mining stocks/etf's I hold in my US portfolio. Now I hold only AGQ and DGP, apart from a small position in GDXJ. I also hold large positions in spot gold and silver via a CFD broker, where my leverage is 100 - 1. That means 1% down. As gary from sentiment trader recommends, I'm holding on to the bull with both hands, it's been a wild ride (particularly last night) but so far its working out really well for me.

    ReplyDelete