Ask anyone about the precious metals and they probably will say something like “They are always a great investment and you should be buying them now before they fly back up.” The problem with this isn’t that their argument isn’t coherent, it is. The problem is it isn’t actionable – that same argument could have been said for the past few years. No one knows when the bottom is, period. So using the historical performance to justify buying/selling solely based upon the what it has done in the past week/month/year is foolish. What gives someone the power to determine what is ‘down a lot’ or ‘not down a lot’, or even more specifically ‘down a lot to the level you need to buy.’?
Here’s the point: No one knows when the bottom is, just because something goes down, doesn’t mean it has to go back up according to your definition of what ‘down enough’ is.
This being said, there are patterns in which price forms that indicate which way the security may move and whose ‘in control’. In the case of the precious metals, there is a potential for a failed breakdown. What this means is: a stock broke down under support, getting people short and then it rallies back above the breakdown point – forcing all the new shorts to cover for losses and subsequently the stock rallies further.
This exact pattern may be occurring in the precious metal sector. Let’s take a look at a few charts.
The above charts are: $GDX, $GLD and finally $SIL – Gold miners, Gold ETF and Silver Miners, respectively. The brown-ish circle that is seen in each one of the charts circles the period of time the stock spent underneath the breakdown point. The horizontal line represents the breakdown level.
So, if this is a failed breakdown then in the next week or two the price of these instruments should pass back above the breakdown level (seen above) and then continue to show strength, creating a new uptrend. If this is the case, there will be a lot of nice trades to be placed, if it doesn’t? Well, nothing changes in that case – the precious metals continue to be very un-precious.
A couple of stocks I like if this is going to be the case (failed breakdown) are $AUY, $NEM and $SLW. This will be something interesting to watch over the next week or so, have a great weekend all.