Precious Metals and Mining Stocks Approaching a Major Bottom

By: Robert McHugh | Sat, May 5, 2012
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There is a pattern finishing in Gold, Silver and the HUI Amex Gold Bugs Index that is bullish, a sideways wave 4 descending triangle that suggests a bottom is fast approaching and a rally that lasts many months is likely to start within a month or two. Triangles are sideways consolidation patterns that let markets digest the previous large move, before continuing in the same direction the trend was headed before the triangle begins. In this case, that trend would be up. This is a pretty large triangle pattern, correcting a three year rally. We could see more decline in prices for another few weeks, then a bottom should arrive.

The next rally will be powerful and last a long time, probably more than a year. That is because it will be a wave 5 move. In the precious metals and mining stocks markets, wave 5's tend to be the largest and longest, most dramatic moves, not wave 3's as is typical in stock markets. The coming rally will be the start of a wave five of large degree.

Playing this rally should be a profitable venture. There are several ways to play it, such as owning the metals physical, owning the individual mining stocks, or playing ETFs such as GLD, SLV or GDX, or playing leveraged ETFs, or even playing call options long.

The signal for when this rally starts will be when several factors line up. First would be when we get new buy signals in our HUI Purchasing Power Indicator, and our 30 Day Stochastic indicator, when at the same time we see the Weekly Full Stochastics oversold, and also when we see the sideways descending triangles' last leg down, wave e down, reach or fall below the bottom boundary support shelf. We present daily updates of the HUI Purchasing Power Indicator and 30 day Stochastic, which are proprietary indicators of ours, to our subscribers at www.technicalindicatorindex.com if you have interest in being plugged into this signal information.

We believe this rally signal will occur sometime over the next several weeks. The final wave e-down is approaching completion. This triangle has been almost a nine month pattern, so Gold bugs will be singing a Halleluiah once this annoying pattern finishes. The upside potential for this coming rally is enormous. The HUI could approach 800 to 1,000, while Gold could approach 3,000 and Silver could approach 60 to 70. It will take time for those levels to be achieved, but the important point is precious metals and mining stocks remain in a Bull market, and the juicy part of this Bull market lies ahead.

The following charts map where prices are now within the sideways descending triangle pattern:

As far as Gold is concerned, Wave 4-down needs another drop for its final leg, wave {e} down to complete a five wave triangle. Wave {e} is about half complete, with a downside target of 1,525ish.

If the HUI generates a new buy signal soon, that would strongly suggest wave {e} down is not going to reach the bottom boundary, it will truncate.

As far as the HUI is concerned, Wave 4-down has dropped below the bottom of the triangle, the downside target, suggesting wave 5-up could start at any time. A rise above 550 would confirm that wave 5-up has started, a decisive breakout above the upper boundary of this Declining Bullish Wedge.

As far as Silver is concerned, A rise above 40 would confirm that wave 5-up has started in Silver. Silver could decline toward the 27 to 30 area before starting a mega rally wave 5-up.

Technical analysis predicts when trend turns are coming, and news events follow completion of technical patterns (which are the language of the market telling us where they are headed next) that support the technical analysis prediction and act as the catalyst for the coming move. We would not be surprised if a formal announcement about a QE3 policy initiation, or something similar, comes in connection with the start of wave 5-up. Precious metals and mining stocks are an inflation hedge. QE3 is the printing of fiat money, which of course is inflationary. The two go hand in hand. Given the awful jobs report Friday, May 4th, and our own analysis (and behind the scenes, their analysis too) that suggests the economy actually lost 91,000 jobs, the Fed will feel pressure to do something to goose markets and soon. Since the BLS report included an estimated 206,000 jobs they did not count, but think may have been created by new businesses they hope started up in April, the CES Birth/Death of businesses estimate. This is a bogus fudge figure. In fact, the economy lost 91,000 jobs, which is 241,000 below the required minimum needed to be created every month just to keep pace with legal population growth. The Federal Reserve, in this election year, has incentive to pump the economy with freshly printed fiat currency, which of course goes to Wall Street, not Main Street, but is great for precious metals and mining stocks bulls.

 


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Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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