It’s Never Easy…

Readers may recall that in one of our recent updates on the gold sector – which we believe is at an interesting juncture that may at the very least provide a good trading opportunity – we presented the chart of the 1992-1993 low in order to illustrate how extremely tricky the sector can be in the vicinity of turning points.

Specifically, the sector made every imaginable move in late 1992 to convince market participants that a durable rally was nigh impossible. Early recovery attempts were abruptly aborted, giving way to merciless and sharp declines. By the time the real recovery started, very few market participants still found it credible. We remember the high degree of skepticism that prevailed in the early stages of this rally quite well actually.

The sector is once again making things difficult, but from a trading perspective there is the advantage that the most recent lows can be used as a stop. The recent mini-crash in the stock market has complicated things – at first, it was seen as a positive factor for gold and gold stocks, but after gold could not hold on to its initial advance, gold stocks began to correlate with the broader market again in the short term and quickly surrendered their gains.

However, in the process a number of divergence have been established, specifically with momentum oscillators. Such divergences often signal impending trend changes, which is why we always pay close attention to them. Below is a chart of the GDX (gold miners ETF) and the HUI Index that shows the divergence between prices and RSI:

GDX and HUI – another price/RSI divergence – click to enlarge.

This isn’t the only remarkable technical signal though. Another one is the state of the “bullish percent” index of the broad gold mining index GDM. This index shows the percentage of stocks in the sector that is currently on a “point and figure” buy signal. The interesting things is that this percentage currently stands at a big fat zero – i.e., it cannot possibly become more “oversold”:

Bullish percent index of the broad gold stock index GDM: at zero, i.e., the maximum oversold level – click to enlarge.

As you can see above, the last time this happened in late 2014, a playable rally promptly ensued (in the course of this rally, many individual gold stocks rose by 100% and more, so these short term rallies are nothing to be sneezed at). Naturally, there is no guarantee whatsoever that the same thing will happen again, but history is actually on our side here – in the past, a zero on the bullish percent index has fairly regularly been followed by sizable short term rallies.

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