Mining Stocks - A Stay at the Bottomz Inn?

I wanted to take another look at mining stocks as something very interesting happened last week that has me potentially very intrigued.  The chart below shows a long term chart of GDX, the larger mining stocks from its 2011 top. You should notice as it began its decent from its 1-year consolidation, the red 200 day moving average flattened and eventually curled down. Over the entire 5 year decline GDX has stayed below its blue dashed downtrend line and formed 4 separate attempts to bottom. The 4th and (so far) final began mid last year.

In strong downtrends violent, counter trend bounces happen drawing in bullish investors hoping they have found “the” bottom and a path to riches. Unfortunately, the bears have never relinquished control and each time the bulls have been sent packing, their tails between their legs and their accounts smaller than when they started. But we know eventually one of these bounces will find “the” bottom, a trend reversal will occur and a new bull market will begin. But when and how will you know?  The simple answer is there is nothing that guarantees a bottom is in but there are some things I would need to see, the more that occur at the same time to feel confident putting client’s investment capital to work.

1. Weekly positive divergence – momentum (either RSI or MACD, or both) is moving higher while price continues to fall

2. Has been recently oversold (RSI < 30)

3. A bottoming pattern is in its late stages or has completed.

4. Price breaks a long term downtrend line to the upside

5. Volume is confirming (rising) the final stages of the pattern

6. The 200 day moving average has flattened and begun to point north.

7. At least one higher high and one higher low has been made.

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With that in mind lets take a look and see where we stand

1. Weekly positive divergence – Check

2. Has been recently oversold – Check

3. A bottom pattern is in its late stages or completed – Check

4. Price breaks a long term downtrend line to the upside – Check

5. Volume is confirming (rising) during the final stages of the pattern – Check

6. The 200 day moving average has flattened and begun to point north – Not Yet

7. At least one higher high and one higher low has been made – Not Yet

As of this post, 2 of the 7 items have not yet checked their boxes so while not a slam dunk there are some very positive signs this downtrend could have already ended. It is absolutely not necessary to have all items checked for a bottom to form, it’s just the more that have, the greater your confidence.  Would you prefer to have 2- 10’s in a poker hand or 4 - queens?

Looking at the daily chart we see we are currently short term overbought and in need of a rest (pullback) to let this condition unwind. If this were this to occur and price stayed above the blue support/resistance rail just below (as I have illustrated with red arrows), it would put the icing on the cake as it will complete the two unchecked boxes from my list above.  A pull back would form a higher low (box #7) and give the 200 day moving average a few more days/weeks to finish its current reversal process (box #6).

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The last two weeks for precious metals and the miners has been extremely constructive and promising for long term bulls. While they are not out of the woods yet, I am willing to be a buyer on any pullback that stays above the 16.80 level at which time I would more confidently say the Bottomz In. If that level fails to hold, I see no reason to be long.

I couldn’t close this post out without mentioning a couple of extremely valuable lessons here that investors should take note and burn into memory. On Jan 27, I last posted on GDX mentioning the old adage about from failed breakouts come big moves and as it turns out, this is another example as price has risen almost 50% in 3 weeks. There are lots of reasons why this occurs but that is the subject for a separate post. When this occurs it is my opinion investors need to quickly get out the way before they are crushed underneath the stampede moving in the other direction. I saw the breakdown and shorted the miners. Within two days the market told me I was wrong at which point I closed my short and went long. I was wrong but still made money. Sometimes ego’s get in the way of investing and it becomes hard to accept you are wrong. Not for me because I learned a long time ago, you need to leave your ego (and biases) at the door when investing because a big ego and expecting to make money in the markets make for a bad combination.