Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

What Does The Junior Gold Mining Sector Say about the Gold Price Next Move?

Commodities / Gold and Silver 2010 Aug 28, 2010 - 07:03 AM GMT

By: Przemyslaw_Radomski

Commodities Best Financial Markets Analysis ArticleWith gold rising almost each day now, those of you, who are holding the yellow metal as a long-term investment are most likely happy with this situation. However, Speculators, and particularly Contrarians are probably waiting for the slightest sign of weakness in order to profit in the following correction. As we all know, no market - virtually regardless of the fundamental situation - moves in a given direction in a straight line.


Periodical corrections need to happen from time to time, as Investors and Speculators are ultimately human beings driven not only by cold logic, but also by emotions, out of which greed and fear as the most important ones when speaking about investments. When greed takes over everyone buys like there's no tomorrow and the price spikes high. The problem is that there comes a point when everyone that were interested in a given asset are already in the market, and since that is the case, there is nobody left on the sidelines, who can enter the market. In other words, there is no fresh capital flowing into the market that would ensure further rallies.

When there's nobody left to buy, the rally runs out of steam, stops, and then starts to decline. Speculators rush to secure their profits and they sell their positions, thus making the price move even lover. This is exactly how local tops are formed, and these need to take place from time to time. Consequently, one needs to deal with this situation, and the best way of doing that is to take advantage of it by using a part of one's capital to bet on these short-term price moves.

This brings us to the main point of this essay - how do we know that a local top or bottom is likely to be formed? There are myriads of ways to do so, but not every one of them can be successfully applied. While it is not the point of this essay to explain each and every detail of selecting the best tools, we would still like to suggest using tools and techniques that specialize in a particular market (or sector, or even particular stock) first, and only if you don't have this "tailored" guidance, resort to popular analysis. Also, please remember to check if a particular tool had indeed worked in the past.

Speaking of dedicated tools, please take a look at the chart below - this is something that we've featured in last week's Premium Update.

As we have thoroughly explained last week, the GDXJ:SPY ratio aims to isolate the emotionality regarding gold. The GDXJ represents juniors (it is an ETF that serves as a proxy for the sector). Normally the smaller companies outperform larger mining companies (seniors) when stocks are rallying and underperform when stocks are declining. The emotions of individual investors greatly influence this market.

When the ratio is excessive, emotionality is in great supply and - if preceded by a strong rally - a local top is likely to be seen. In last week’s update we stated the following:

(…) we've been striving to find a way to measure this phenomenon and we believe we found two ways to do it.

First is taking a look at the values of size of a rally in the ratio and comparing it to the size of the rally in gold. If it's bigger it means that the public is very excited about this rally, which suggests that a correction will be seen quite soon. We've seen that in early January, May, and June 2010.

If the rally is smaller than that of gold, it means that people are still waiting on the sidelines and are ready to jump back into the market once they get more convinced about the rally. When would that take place? When price rises. Consequently, when the prices rise, people will buy more and the prices will rise even further. Yes - it is against the buy low, sell high rule, but this is how things play out most of the time. We've seen that since February to early April 2010 - and the rally continued afterwards.

The second way to analyze the ratio is to apply indicators, and two of them appear particularly useful. The less useful of these two is the well-known RSI indicator - please take a look at the areas marked with black ellipses. The signal is visible only for most important tops (it is visible today though...).

The most useful indicator here appears to be the Rate of Change indicator. As it name suggests, it measures the rate of change, which is another way of calling the "steepness of the rally" or its "rapidness". High values here indicate optimism. As visible on the chart above, excessive emotions result in an ROC greater than 10, which likely results in a top forming soon thereafter. The ROC indicator was just at the 15 level - actually an all-time high for this indicator when applied to this particular ratio, which serves as a strong indication that the local top is in or is very close to being in.

As you may see on the chart above, we see further indications of the excessive optimism among precious metals Investors, which is bearish in the short term. One of the questions that we've received this week was about the fact that most of the time this ratio appears undervalued. Generally, that is true, and the long-term implications are bullish for the metals. Most of the time we don't have the excessive optimism like we have today and the trend remains up, as new Investors "discover" precious metals and enter the market.

Before summarizing this week's essay, there is one more thing that we would like to comment on - namely, the Hindenburg Omen (it name comes from the Hindenburg catastrophe of May 6, 1937, when the German Zeppelin Hindenburg was destroyed). We have received several questions about this phenomenon from our Subscribers, which asked about our view on the fact that it had flashed two signals in the past two weeks.

Without going into details - the Hindenburg Omen is a rather sophisticated technical indicator that is based on the number of stocks that formed a new 52-week high, and that reached a 52-week low. Other exchanges can be used, but typically NYSE is. The idea is that when there is a large number of both new lows and new highs on the market, then there is a high probability of a big downswing in the market in the following several weeks/months.

Therefore, the Hindeburg Omen is a long-term indicator, not necessarily a short-term one, which doesn't say much about the short term (a quick rally could be seen in stocks soon). What it does say is that a bigger decline could follow in the next several weeks.

Generally, we see the logic behind this indicator as credible. We have not tested/verified the accuracy of this indicator ourselves, but the reason is that… We've come to the similar conclusion on our own regarding the precious metals market about 1.5 years ago. In fact, the sample version of our Premium Charts section includes its description - it's about our SP Gold Stock Extreme Indicator (note that it flashed a signal when the HUI Index topped in May 2010). Once you go to the page above, you will notice that while our road toward similar calculations was different, but the main point is very similar. Quoting from that page: "if the abovementioned assumptions are mostly true, then the ratio between 'top' PM stocks and the rest should behave specifically around bottoms and tops". While we don't provide the exact formula, the idea is that we also (like it is the case in the Hindeburg Omen calculations) take a look at the divergence between leading and lagging stocks - when it's huge, the indicator flashes an "extreme" signal.

This is just a speculation at this point - but, if the Hindenburg Omen is correct, and the general stock market moves significantly lower and the recent correlation between stocks and gold remains negative, it could translate into the next massive upswing in the whole precious metals market. Again, we don't see that happening immediately, and we will certainly get back to this once we have more information in the following weeks. It might be a good idea to join us for this ride, and enjoy the full version of our precious-metals-focused analysis right away.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules