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What kind of bottom? That is still the question

Richard Russell snippet
Dow Theory Letters
Posted Jul 02, 2014

July 1, 2014

As for the precious metals complex, it now seems clear that we’ve put in a bottom there. What kind of bottom? – that is still the question. As suggested last week, a knee-jerk bounce off of a market’s previous major lows is almost a given in the world of technical analysis. Therefore, we shouldn’t be too surprised or read too much into gold, silver, and the mining shares bouncing off of last year’s lows. The strength of the bounce is encouraging, and we may well be seeing the early stages of something big in the metals, but remember that troubling word “may” is there.

Continuing strength would be good news indeed for those of us with substantial positions in the complex, and especially in the mining shares. We can more easily justify holding physical gold and silver, since they are real money and give us a good hedge against various types of economic problems. But the mining shares, beaten down so much harder and more derivative than actual, they’ve been tougher to feel good about owning the last couple of years. And I’ve got to tell you – I’m ready to feel good about my mining share holdings!

Here’s the thing, though, and forgive me for repeating myself: We don’t get a bull market in gold, silver, or the mining shares because I want it to happen, or because it’ll make us “feel good”. We get bull markets when the long-term (weekly and monthly) bar charts and their moving averages reverse course; we will have bull markets when the most reliable charts of all (long-term P&F charts that use percentage price scales) switch gears. Those P&F charts were featured here a couple of weeks ago; they remain (sorry for the pun) the “gold standard” for identifying the trend, and furthermore, they remain bearish.

That being the case, there is nevertheless cause for optimism. This weekly chart of XAU shows that we’re above the 50-week moving average (MA) on the mining shares, with the MA starting to turn up. Below the main chart, we see the MACDs turning positive, but yet far from being overbought. With yesterday’s close above 100 and a new high for this move, I’d say that as long as this index stays above its MA around 93, things look good. Breakouts above March’s high around 107 and then above last August’s high of 113 would give us a long-term “all’s clear!” on the miners.

The charts for gold and silver look very much like XAU’s chart, with prices above their MAs, and MAs starting to turn up. Gold and silver similarly have to get above the previous highs of March and last August in order to be considered truly bullish on the weekly charts.

This P&F chart of spot gold pretty well summarizes the picture there. Breaking above the two successive downtrend lines confirms that gold (and the rest of the complex) are bullish on an intermediate-term level. That likely means several weeks or perhaps months of higher prices. But gold really needs to get above that big top at $1390 before we can seriously start talking about a new long-term bull market.

So we’re not there yet, but the metals are making progress. Given the precious metals’ history of past false starts (please - do not ignore the costly lessons from the whipsaw years of 1980-1999) the Proper Investment Procedure (PIP) under the circumstances would be to stay calm. Buying some mining shares here, or a little more gold and silver, is fine if you are so inclined. But backing your van up to the local coin store and really loading up on the precious metals is neither particularly prudent, nor justified yet by the technical picture.


Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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