The Major Hurdle

The charts employed in this article were prepared after the close on Tuesday July 16, so they do not yet reflect any changes that may occur in intraday trading today (Wednesday). However, the message, or let us say, the technically important points, won't be altered by this.

In our previous update we noted that what one thing that is required to change the market's character (i.e., that is required to switch it from bearish to at least short to medium term bullish) is to close at least one of the previously established gaps by rising through them.

Yesterday the gold stock indexes took a first step in attacking the first major gap, by rising slightly into its territory. Assuming that this time, closing the gap will be accomplished, the question arises what the next major hurdle is. Since we like to keep things simple, we are settling on the still declining 50 day moving average. This moving average has proved to be impenetrable resistance on the way down, with the last major failure recorded in early June:




The HUI index has begun to rise into the territory of the first major gap. Note that the last attempt at a trend change from mid-May to early June ultimately was rejected by the 50 day moving average. Rising above this moving average and staying above it in the first retest is the next necessary ingredient to gain confidence in a trend change – click to enlarge.





From the point of view of bulls, an ideal progression would therefore be: closing of the gap, followed by penetration of the 50 day moving average, followed by a successful test of the moving average as new support on the first pullback, followed by a flattening and upturn of the moving average.  In short, a lot of 'work' remains to be done. As pointed out in the notes to the chart above, the divergence between price and RSI on the daily chart is not as pronounced as that between price and MACD. However, we do see a very pronounced price/RSI divergence on the weekly chart of the HUI, coupled with a tentative MACD buy signal:





HUI-weekly annot

On the weekly chart, a large price/RSI divergence is in evidence now and MACD is about to issue a buy signal in the weekly time frame – click to enlarge.



It is course quite good to have MACD buy signals in both the daily and weekly time frame. This increases the chance that a genuine turnaround is underway and it also increases the chance that it will be at least of the medium term variety (measured in weeks and months rather than days).

Having said all that, gold itself still has to overcome the first major level of lateral resistance as well and there are many layers of resistance visible on the chart (see further below). First let us briefly look at the HUI-gold ratio though. The current situation is at least tentatively positive, but it is still far from conclusive (and we remember well how a seeming breakout in the ratio proved to be a trap in early June, so take this with a grain of salt).



HUI-gold ratio

The HUI-gold ratio once again tries to turn up. The same positive divergences are in place, but obviously no definitive trend change is in place yet – click to enlarge.



Looking at a very long term monthly chart of the HUI, we were struck by an idea. This idea may not have much merit, and there is certainly nothing yet that could serve as proof for its validity, but let's have a look anyway:




HUI monthly. The first thing worth noting is that the recent decline has hit a trendline that connects the late 2000 and late 2008 lows – click to enlarge.



The trendline shown above is however not the feature we wanted to talk about. If one looks at the progression from the year 2000 low to the March 2008 high, one is struck by the clearly discernible impulse wave character of the advance. Now consider by contrast the period within the circle – i.e., the 2008 decline, the subsequent rally and the decline since 2011. Although the advance from the 2008 low was very large, it lacks the clean impulsive look of the 2000-2008 rally with its clearly discernible impulsive wave structure. So the thought that  has struck us is this: what if the entire sequence in the circle is in fact a corrective wave? In this case the 2008 decline would be wave A, the subsequent rally from 2008 to 2011 would be wave B and the decline since 2011 would represent wave C.

It is therefore possible that the entire structure is a giant second wave that has corrected primary wave 1 from 2000 to 2008. If so, then the next major move on this long term time scale could be a third wave. As noted at the outset, there is nothing yet to prove or disprove that theory. It is merely a possibility that suggests itself due to the different character of the action from 2000 to 2008 and everything that has happened thereafter. Consider also B.A.'s comments further below in this context.


Gold – Technical Conditions

As indicated above, gold itself also remains below the first major technical hurdle so far. In the chart below we have indicated the many layers of lateral resistance between current prices and the former support level (now major resistance) in the $1,525-$1,550 area:



Gold-daily-annotSimilar to the HUI, gold must still overcome even the first major resistance level. However, it too sports a positive price/momentum divergence – click to enlarge.



In euro terms, the psychologically significant € 1,000 level roughly corresponds to the resistance at $1,320 in dollar terms:



Gold in euro

The $1,320 to $1,330 resistance in dollar terms corresponds to € 1,000 in gold priced in euro. The above mentioned divergences are in place as well – click to enlarge.



It is to be expected that technicians and trend followers will try to increase their gold short positions at these resistance levels. Therefore some selling pressure is likely to emerge when they are approached. Whether or not these resistance levels can be overcome at all, and if so, how quickly, will be an important indication of the market's strength – or as the case may be, the lack thereof.

If e.g. gold were to burst through the $1,320-$1,330 without hesitation, it would certainly indicate a character change as well. It is however more likely that this won't happen and that prices will at least initially stall out at this level. Even if this resistance is bested, it seems likely that some sort of retest of the lows will happen further down the road.


B.A.'s Comments on the 1970's 'Mid Cycle' Correction

Our friend B.A., whose medium/long term Elliott wave counts of gold and silver we have previously presented, has provided us with a very interesting comment on the comparison of the current bear market to the 1974 to 1976 mid cycle correction, which we hereby bring to the attention of our readers. The major weakness of the comparison has always been the fact that the fundamental backdrop of the 1970s bull market was quite different from that obtaining at present. B.A. therefore argues that it may make more sense to compare the current period to the 1960s rather than the 1970s. What is happening at present may well be what would likely have occurred had gold traded freely at the time. Readers will notice that B.A.'s comments also jibe with the 'wave 2 correction' idea we have briefly discussed above in connection with the long term HUI chart.


“I read your blog post this morning:

An additional point worth making: if the current bear market indeed corresponds to the 1974-1976 mid cycle correction, note that gold stocks were still 50% below their 1974 peak when gold returned to its level of late 1974 in 1978. Gold then rose much further into early 1980, but gold stocks only managed to reach the same level they had already attained in 1974. They were very volatile along the way, so 'trading around' oversold and overbought situations was a good strategy at the time. Ironically, gold stocks then rallied hugely after gold had reached its top – when it rose into its secondary peak between April and September 1980, they rallied to about twice their level of January 1980 (a brief summary of the events with charts can be found here). The market had finally become convinced that higher gold prices were here to stay when it was all over. This fits well with our previously stated thesis that the market usually 'knows' absolutely nothing, especially near major turning points.

And I read the article you linked:

Of course, everyone is now comparing the current decline in gold to the only other deep correction we have to look at: 1974-1976.  I know you know this, but such comparisons to such a limited 'sample set' are only going to be so useful – and probably less useful than assumed.  The 1976-1980 period was an extreme environment for equities of all stripes, and the current environment doesn't resemble that period in most key respects.  If gold were trading freely at the time, I would think the current correction would be more comparable to a correction gold likely would have experienced somewhere in the late 1960s, or between 1970-1972 – at some point well into the monetary expansion, but well before any significant rise in prices.  If that correction had in fact occurred, we would today label it as a Wave 2 correction, and the 1974-1976 decline as a Wave 4 correction, instead of a 'mid-cycle correction.'      

I have the feeling that the sentiment surrounding the peak in 2011, and the sentiment today, would have likely corresponded closely to such an early Wave 2 correction during the last bull market, not the 1974-1976 correction, but that is just a hunch.  Most people I have talked with started to hear about gold/silver for the first time in 2010-2011, but it has since fallen off their radar as bonds and stocks have rallied.  We're well into this period of monetary expansion, but we haven't yet entered the phase where it starts to affect consumer prices significantly – just like in the late 1960s (& early 1940s).  Yet, when I look at long-term trends in demographics, debt and valuations, it appears to me that we are still in the early stages of this current adjustment period, and if so its likely gold is still in the early stages of its bull market. 

That prospect may be a bewildering assessment to those like Barry Ritholtz et al., but it seems to be an entirely logical conclusion from the debt and demographic data.  And it makes charts like the one below, to me at least, a screaming buy.  Whether or not silver (& gold) have put in a low in the short-term, I have little doubt the upside from here far outweighs the downside.  And debating the short-term price action in gold and silver at this point is, to me at least, like arguing in 1982 whether the Dow will break the 1980 low – it may well decline more in the short-term, but we may also be quite close to the beginning of a much more dramatic phase in this bull market, and the price changes that appear so important now will likely look insignificant later – just like the $30 and $40 "corrective declines" of 10 years ago…”



The chart referenced in the comment above is this one:



BA's silver chart

B.A.'s chart of silver: does 'buy low, sell high' mean anything to you? If so, then the current set-up in silver looks compelling – click to enlarge.




We know what to look for in the short term to confirm whether a trend change has occurred. Once a credible short term rebound is in place, it is likely that some sort of retest will happen down the road, but we will cross that bridge once we get there. Keep in mind that lows in gold and gold stocks tend to be less 'spiky' than highs, so there could conceivably be a drawn-out consolidation period before a significant move occurs.

Apart from these short to medium term considerations however, it appears that  an excellent long term opportunity now exists. Whether or not the absolute lows have been seen is not relevant in this context. One cannot operate under the assumption that one will be able to identify 'the' low in real time; at best one can determine what the risk/reward situation is. The long term risk-reward equation seems to be favorable, especially from a fundamental perspective.

From a technical perspective one can determine 'if-then' type propositions ahead of time, which is what we have done above. We urge readers to keep in mind what the nature of the analysis above actually is: it is not a 'prediction'.  We are not forecasting a rally, we are only pointing out which conditions must be fulfilled in order to become confident of a trend change. Since these conditions have not been fulfilled yet, there may not be a trend change in the offing at all – the downtrend may still have further to run.  There are however reasons (such as the recent price/momentum divergences and the previously discussed heavy insider buying in the gold sector) to remain alert for the possibility of a trend change at the current juncture.




Charts by: BigCharts, StockCharts




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5 Responses to “Gold Stocks – What to Look for Next”

  • SavvyGuy:

    Excellent analysis, as usual. But I just wanted to mention a caveat regarding MAs and MACD indicators in general.

    The price movement in every market represents an ever-changing balance point between buying and selling pressure, in the same way as the movement of a football on the field shows the differential success of one team versus the other.

    Moving averages and MACD indicators attempt to assign meaning to variations between prices averaged over different time periods. More often than not, some “typical” or “traditional” time periods are chosen e.g. the 50-day and 200-day MAs.

    However, a frequency-domain analysis of price movements will show spectral energies that may be quite randomly distributed. In other words, market prices are not inherently “obliged” to provide any meaningful information via their 50-day or 200-day MAs, or MACDs with arbitrarily-selected time periods. Prices can do whatever they want, and oftentimes looking at MAs or MACDs is like looking at a Rorschach inkblot…we will see only what we want to see!

  • roger:

    Hi Pater,

    BA really did present something very interesting regarding the analogous circumstances. The argument is sound that today’s situation resembles more the conditions at the 1960s, not the mid 70s. This is just a thought exercise, but let’s continue with BA’s line of thought.

    While the analogy is sound, there are also key differences of present condition to those periods. In the past, the unsustainable debt which resulted in the monetary conflagration could still resolve in a modest way. Let’s call it a “modest conflagration” because while the US effectively defaulted, the repercussions weren’t that severe. Productivity gains around the world could correct it in a big way in the 1980s. I guess this made USD a viable world reserve currency for quite a while. Basically, those productivity gains bailed them out.

    This time, the situation is a lot different. If we compare the debt situation, today’s global debt levels are truly monstrous compared to that time. This and the growing statism are also putting a serious damper on a possible productivity gains that may bail them out. So, a “modest conflagration” as in the 1970s may be out of the option in today’s world. In this line of thinking, the 1970s equivalent of today’s condition may be of significant difference. In the 1970s, the conditions resolved to a “modest hyperinflationary conditions” (an oxymoron, I know). This time, will it be not more likely for the whole system to experience some kind of binary condition, i.e. a deflationary collapse or a serious hyperinflation?

    From an investment perspective, the two outcomes will bear a significant different in terms of investments, even in regards to gold vs silver. In a deflationary collapse, silver tends to have a bit of negative absolute performance, although it is of large positive relatives to other assets (read this from 1800s deflationary collapse studies from IGWT 2012), while gold is of significant absolute positive performance. However, in hyperinflationary conditions, silver tends to outperform gold quite significantly. Gold-silver ratio dropped to 17s in the 1970s. Today the gold silver ratio stands at around 67.

    In your view, which will be the more likely outcome if we’re indeed faced with that kind of binary condition? Or could it be that we will experience something different and it’s absolutely impossible to tell now what it will be?

    • jimmyjames:

      Excellent contrarian analysis- thanks
      Who knows where we go short term- but as someone once said- when there’s blood in the streets- buy

    • SavvyGuy:


      You bring up a good point regarding the silver-gold ratio as an indicator of whether we are headed into a hyper-inflationary conflagration or a deflationary collapse.

      A few months back, Market Anthropology ( showed that the long-term silver-gold ratio had formed a bearish rising wedge. The lower trend-line on the wedge was rising steeply, showing that the inflationary attempts of CBs were working so far, as evidenced by the rising silver-gold ratio. The upper trend-line was rising more shallowly, as the market recognized that inflating debt is inherently self-deflationary if not serviced.

      We are getting closer and closer to the apex of this wedge. Will it breakdown into a deflationary collapse or throw-over to the upside in a hyper-inflationary crack-up boom?

      • roger:

        Hi SavvyGuy,

        If we are to look at the outcome from that perspective only (gold-silver ratio), then the more likely outcome will be (hyper)inflationary — due to mean reversion. But I don’t feel that this is necessarily a correct way of determining the outcome (deflationary / inflationary). For example, just less than 2 yrs ago we had gold-silver ratio of mid/high 30s, and now we are at 67… while the conditions are pretty much the same (in the sense it’s following an established trajectory): CBs inflating furiously, ZIRP, no collapse big enough to completely unravel the monetary system, bailouts applied to prevent collapse here and there, etc.

        There is never an occurence that gold-silver ratio goes really wacky to 100 or more (correct me if I’m wrong). But historically, this kind of insane monetary experiment has never been done on such a scale, either. Gold-silver is usually taken as a credit risk signal. Credit risk today is probably the highest ever recorded in the world history. In this perspective, it may justify gold-silver ratio going absolutely gangbusters.

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