Wednesday, May 17, 2017

Gold Miners Are At A Technical Juncture To Watch

The gold miners have been in a limbo for months now, but that is approaching an interesting condition. To better appreciate just how interesting, it would be good to go back a couple of posts to "Will Gold Ride Again?" and read that first.

So what is gold doing now that's so interesting? The miners are replicating a breakout condition they did in early 2016. Back then, it was a breakout that ended the four year decline, now it appears to want to end a continuation pattern. This is the common consolidation pattern after a big move where the bigger trend is continued after a mostly sideways period:

Here we have the two pennant formations compared. The first was the end of the long four years of decline, then we had the sharp climb in 2016, then we have had the limbo going into 2017. If this breaks to the upside, it will have been the classic continuation pattern with a new bull leg ensuing, continuing the 2016 move. The A/D (Accumulation/Distribution) and CMF (Chaikin Money Flow) cycling is very similar. In both formations, there was a positive switch trend in place in money flow, and we are at the takeoff point in that cycling.

I've also shown what I call the MAPS divider (Moving Average Pair Separator) which is the best divider of bull and bear market I've found. This is the 140 day exponential moving average plotted with the 200 day alongside, the blue and red lines in the chart. All during the four year decline, the miner index kept below MAPS very consistently. Once the break occurred in early 2016, we had a brisk positive moving average crossover which has morphed into essentially no separation in 2017's consolidation. If the formation breaks to the downside, it will produce a negative cross and puts gold back into bear mode. If it breaks to the upside, it will keep the bull cross in place.

The forces that will move gold from here are many and complicated. If interest rates go up, the dollar is defended, the economy is OK, and gold goes down. But gold has historically gone up when rates start going up, as in the late '70s. We've had political turmoil in Britain, France, the US, and elsewhere, which should move gold up. But we had gold in bull mode before any of that came along - in the politically uneventful times.

I think the main fundamental controlling gold is probably its role as an alternative currency. That was the main concern in gold's bull market in the early 2000s as the debt/dollar situation grew worse. It was the concern after the financial crisis into the bull leg to 2011. And it is still probably the main concern.

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