There are very few sellers left

There were very few sellers left in January 2016 when the devastating “forever bear” was about to end. Six months later and a 150% rebound in the large caps and 200% rise in the juniors (GDXJ) provided sellers an opportunity. They drove the miners and juniors down by 40% to 45% in less than five months. However, both GDX and GDXJ have been able to hold above that low multiple times. GDX has held $21 four times! GDXJ has held $29.50 twice in solid fashion.

The bears had multiple opportunities in 2017 to push the miners lower but the miners held above their December 2016 lows and maintained the 62% retracement of the 2016 surge. The miners did not break out in 2017 but they held key support multiple times and the latest rebound suggests selling power has dried up.

The recovery pattern following a mega-bear market bodes well for gold stocks in the second half of 2018

In November we wrote about this history and the potential implication for gold stocks in 2018 and beyond. The mega bear markets that compare to gold stocks from 2011-2016 with respect to price (+80% decline) and time (+2 years) follow a distinct pattern. The initial rebound is sizeable in price but not so much in time. That gives way to a correction and consolidation that lasts a minimum of 18 months. Then the market surges higher in third-wave like fashion.

The gold stocks are nearly 17 months through their consolidation. We do not know if the consolidation is ending soon or if it will last another three, six or even nine months. We do know that history argues the correction and consolidation should end sometime in 2018. 

Gold is not too far away from breaking out

Gold is much closer to breaking its 2016 high than the miners but the miners could begin to sniff that potential breakout in Gold before or as it happens. Gold recently bottomed around $1240 with sentiment indicators at encouraging levels. In the chart below we plot Gold along with its net speculative position as a percentage of open interest (CoT) and the GLD put-call ratio. The CoT recently touched 27% which, although not a bearish extreme is fairly low relative to most readings since February 2016. The GLD put-call ratio recently touched the highest level in more than two years. With current sentiment relatively muted, Gold has a chance to rally up to trendline resistance. That would put it in position to breakout sometime in 2018.