So far in the past 6 months gold has made two important lows, a December 2013 low and a June 2014 low. The June 2014 low was a fake breakdown turned fast move higher. This is very important, since every rally in gold has failed for the past couple of years during this bear market. Now we finally have a breakdown in gold that failed, a bullish omen. But a hidden piece of information that is just as bullish as this failed breakdown is how certain mining stocks are behaving.
Mining stocks come in all different shapes and sizes but one factor that binds them together is the price of gold. Mining is a tough business, and even the best mining companies in the world can't function well with a low gold price relative to their cost of production. So when the gold price is in a downtrend all mining stocks tend to get punished and sometimes severely punished. But one thing to remember is markets are always forward looking. So we should expect that if gold were to finally stop its downtrend, the market would start to reward the "better" mining stocks with higher prices.
This is actually exactly what we are seeing in certain mining stocks right now. We now know that gold made a major bottom in December 2013, because we can look at it in the rear view mirror on a chart. So once gold made that low, pressure started lifting on the stronger mining stocks. But gold made a secondary low in June 2014 that exerted additional pressure on the mining stocks. This actually pushed many weaker mining stocks to even a further new low. But the stronger stocks rejected this secondary bottom in gold, and either traded sideways or continued higher.
Let's take a look at some examples. The first example is Stillwater Mining, a platinum and palladium producer. Stillwater is more tied to platinum and palladium than gold or silver, but since they are all precious metals which are very strongly correlated it's a valid example. Once precious metals made that important December 2013 bottom, the pressure on SWC drastically reduced and it immediately launched into a new Stage 2 uptrend. This is very bullish action. It's even more bullish the way Stillwater rejected the pullback in precious metals from March to June 2014. Stillwater remained in a strong Stage 2 advance during this pullback and took barely any technical damage.
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Gold has failed to breakdown significantly from the tight coil pattern it created over a 2-month period. Failed breakdowns often mark key reversal points in markets, especially after moves that take a while to play out. In a downtrend, the duration of the move produces the angst and disgust that causes most of the selling. Then the final break of support creates the final flush out of the weak holders who didn't sell out earlier in the move.
When there's not enough selling pressure to continue the breakdown, the market often reverses higher in a fast and powerful manner. The selling pressure isn't there anymore and new buyers push the market rapidly higher. The market basically gets caught looking in the rear view mirror, expecting more of the same thing to happen forever. Meanwhile, quickly and with force things change when many aren't paying attention and a new trend develops.
After the coil in gold broke down in late May I noticed that sentiment on gold turned very bearish as if everyone was throwing in the towel. I even heard a podcast that I've never witnessed bearish on gold, say it wasn't a good time to buy gold. But as of yet, the breakdown out of this coil has not produced significant follow through selling. Check out the chart of gold below to see exactly how this has unfolded.
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It's constructive to look at the other side of your positions to see where you might be wrong. If you're long a market a good way to do this is by taking the inverse of the symbol representing your position. At stockcharts.com, you do this by putting "$ONE:" in front of your symbol and it shows you a chart of the inverse of your position.
I like to do this instead of looking at the leveraged ETFs because they tend to decay over time. The non-leveraged inverse ETFs are fine but they don't exist for many markets. Therefore using "$ONE:" gives you the bear market perspective of anything you want to look at.
Let's take a look at the bear market in gold stocks that launched in 2011 by looking at $ONE:GDX. From a Stage Analysis perspective you can see a nice Stage 1 base that developed in 2011 followed by a breakout of the base in 2012. Then the bear market in gold stocks retested the base which happens a lot in early Stage 2 transitions. After the retest the bear market was off to the races in 2013 with the recent high occurring in December 2013. Notice though that in 2014 we are now seeing the 30-week moving average flatten out, and a head and shoulders topping formation has shown up on the chart. This is classic Stage 3 topping action.
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At any given point in time different markets are at different points in their long term cycles. Markets can be anywhere from just starting a new bull market to late in a parabolic top on the bull side. On the bear side once a market tops it tends to go through either a bear market downtrend or a sideways consolidation that frustrates the bulls for an extended period of time, or a combination of the two. As a longer term trader the goal is to try and determine where the market is in it's cycle and to get positioned as early as possible to capture the biggest profits.
Two markets that are at very different points in their cycles are gold and Internet stocks. These two markets don't have anything to do with one another but both are important and have their own following among investors. The key is forgetting about biases towards these markets and focusing on where they are in their long term cycles to determine what, if any, opportunities they hold.
Internet stocks have made a lot of headlines recently because they made huge moves to the upside in 2013. Then they crashed over the last few months. If you go back and look at a long term chart you'll see how this all unfolded.
First let's take a big picture look at where Internet stocks have gone. This chart shows the Morgan Stanley Internet Index going back to it's induction in 2000, coincidentally at a major top which was the tech bubble. After suffering a disastrous bear market from 2000-2002, Internet stocks embarked on a new bull market along with the bull market in general stocks. But one thing to notice is Internet stocks were not a leading sector during the bull market from 2003-2007. This tends to be typical for a sector that led the previous cycle. Internet stocks barely outperformed the S&P 500 during this period.
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I listen to CNBC sometimes. Usually when I'm running around or working out or something. Not for the opinions of the traders, which I find more entertaining than useful or informative. Mostly for the news: earnings reports, profiles on new products and companies, etc. They do an okay job of covering major financial news stories of the day, even if they tend to be biased towards whatever is hot at the time and over-hyped (which also makes CNBC an interesting sentiment gauge).
One of my favorite things from an entertainment perspective is when one of the hosts turns to one of the traders and says: "What trades did you do today"? And usually whoever the trader is gets all fired up and gives some glossy rationale for why the trade they just put on is awesome and should make a bunch of money. I find this behavior amusing in multiple ways but what would be great is if just one day the trader would say: "You know I didn't do anything today, there wasn't anything to do."
These people act like the market gives you big opportunities on a daily basis. In reality the daily opportunities are all about squeezing profits out of little minuscule moves in the markets often using excessive leverage. And when the market gets volatile and choppy this excessive leverage often works against you and causes you to get stopped out trade after trade. This causes your account to get "chopped up" as the small losses start building up and also effects your psyche in a negative manner.
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Next month marks the 3-year anniversary of the bear market in silver that started in May 2011. Later this summer we will hit the 3-year anniversaries of the bear markets in gold and gold stocks. We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.
In reality though gold has been in a basing phase. It's not going down anymore, it's going sideways where the downward plunges are muted and the upward rallies are still fake bear market rallies. What's interesting about this base is that it started right at the height of bearishness in the gold market. That two day massacre in gold back in April 2013 when gold plunged below $1400 actually started the left hand side of the base. So right when everyone was panicking about gold, in reality it was starting to form a major bottom!
Just a couple months later after trying and failing to get back above $1400, gold made the low point in the base in June of 2013 around $1200. Gold then tried once again to get back above $1400, but then failed and retested the bottom of the base in December 2013. So a well established base formed in gold between $1200 and $1400 as you can see in the chart below.
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As we get geared up for the Sweet 16 this weekend it's interesting to note how investing and participating in a NCAA tournament bracket pool share some similarities. To win an NCAA pool, you have to pick a bracket that beats your opponents by picking teams that win games and earning more points for correct picks than everyone else. In the market you have to pick assets that go up or down in price before your opponents get into the same assets, so that you have someone left to sell to, to realize your gains.
You get the most points in an NCAA pool by picking the correct Final Four and winning team, and the least amount of points for the early round games. In investing you usually capture bigger gains by taking a longer term view and betting on big trends.
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Bear markets can be devious creatures. They start off with a lot of emotion, usually some type of euphoria and excessive optimism at the top. But underneath it all the market is typically thrashing, making volatile swings as buyers are piling in at the wrong time and sellers are taking profits.
Once the sellers take control the bear market starts it's downtrend. At that point the bear launches into it's second phase of faking out market participants, i.e., the bear market rally. These periodic false rallies serve to make it look like the bear has ended. But once each bear market rally fails, the next leg of the bear market is kicked off.
As a speculator it's important to learn from bear markets, how they form and how they deceive on the way down. The more experience a speculator has with bear markets the more prepared they will be for the next one. Let's take a look at some key lessons we can take from gold's latest bear market:
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If gold is entering a new bull market then it's a great time to get in. Technical evidence is mounting, big volume is coming into gold mining ETFs and they are leading the market. Take a look at the monthly volume on the Junior Gold Miners ETF GDXJ. After a huge volume increase in January, the buying pressure hasn't subsided as February is set to smash the record volume set just last month. GDXJ is also pressing up against downtrend resistance and the monthly MACD is turning higher, setting up a potential breakout.
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The gold sector is on fire. GDXJ is a leader in the ETF universe up over 40% YTD. According to the Stage Analysis below GLD, GDX, and SIL all transitioned into Stage 1 this week. On individual gold stocks, over 70% of the stocks listed below are now in Stage 1 or Stage 2. The volume in GDXJ and GDX were also huge last week, GDXJ traded over 25 million shares for the week which blew away previous record volume. GDX had it's second most up volume ever last week. SIL had it's most up volume since 2011.
GLD and SLV continued to move higher last week, but haven't seen near the increase in volume that the gold miner ETFs have. I'd like to see the volume in those ETFs increase to confirm the new uptrend. Also I would expect to see some type of pullback or consolidation occur in the gold sector sometime soon, given the huge gains.
GLD transitioned from Stage 4 to Stage 1
GDX transitioned from Stage 4 to Stage 1
SIL transitioned from Stage 4 to Stage 1
AG transitioned from Stage 4 to Stage 1
AUY transitioned from Stage 4 to Stage 1
EGO transitioned from Stage 4 to Stage 1
GOLD transitioned from Stage 4 to Stage 1
HL transitioned from Stage 4 to Stage 1
KGC transitioned from Stage 4 to Stage 1
NGD transitioned from Stage 4 to Stage 1
PZG transitioned from Stage 4 to Stage 1
RVM transitioned from Stage 4 to Stage 1
SAND transitioned from Stage 4 to Stage 1
SLW transitioned from Stage 4 to Stage 1
VGZ transitioned from Stage 4 to Stage 1
AXU transitioned from Stage 1 to Stage 2
EXK transitioned from Stage 1 to Stage 2
MDW transitioned from Stage 1 to Stage 2
MGN transitioned from Stage 1 to Stage 2
MUX transitioned from Stage 1 to Stage 2
NG transitioned from Stage 1 to Stage 2
PAAS transitioned from Stage 1 to Stage 2
PPP transitioned from Stage 1 to Stage 2
RBY transitioned from Stage 1 to Stage 2
RGLD transitioned from Stage 1 to Stage 2
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The views and opinions expressed are for informational purposes only, and should not be considered as investment advice. Please see the disclaimer.
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The media is good at spreading fear in the financial markets. Fear gets people's attention. Yet there's one thing that they never tell you after the fact: buying fear makes money. If you bought the bottom of the financial panic in 2009, whether it was stocks, real estate, commodities, etc., you made money. If you bought the panic over the Euro in 2010 you made money. If you bought the fiscal cliff fear in 2011 in the stock market, or you bought the dip in the dollar as everyone thought it was headed off a cliff in mid-2011, you made money. If you bought the fear in European stocks in 2012, even the fear in Greece where there were riots in the streets, you made money. If you bought the fiscal cliff fear at the end of 2012 in U.S. stocks, you made a bunch of money. There's more than one example each year from 2009 where buying fear and panic in a depressed market made outstanding returns.
How do we translate this into trading opportunities in 2014? One area that stands out is the commodities complex. Fear has been present there since 2011 when commodities topped. The fear snowballed into panic in 2013 in various commodities. The gold and silver markets panicked in April 2013 and bottomed not long after in June 2013. There's still a lot of apprehension and fear in these markets even in early 2014. Yet it's quite possible these markets have bottomed and are heading higher. Take a look at what is performing strongly so far this year (courtesy of Finviz):