alice

NFTRH; Gold Stock Sector on FOMC Day

We have frequently reviewed this daily chart in order to manage the correction that began in August.  The downside target was 160’s to 180, to fill the gap from early April.  check

This sector that produces the ultimate risk ‘off’ asset, gold, got hammered after the election of Donald Trump proved not to be what had been promoted in the media.  It unleashed a surge in risk ‘on’ markets and small crash in risk ‘off’ markets.  In this context, the gold miners have held up pretty well I’d say.

hui daily chart

Let’s leave detailed fundamental discussion aside other than to note that the funda have been wrecked.  But a year ago the funda were not yet ready for prime time, either.  My preferred environment as a buyer is to see the stocks tanking while also witnessing a surge to positive in the sector’s fundamentals (ref. Q4 2008, a flat out no-brainer of a buy).  But January of 2016 taught me that we may not get that.

Instead, a would-be buyer would need to take it on faith that gold will bottom and turn up against positively correlated markets and assets and that the euphoria going on in the stock market is a massive suck-in of dumb, momentum and media chasing money.  I believe that is what it is, but at the same time, I believe the mania could end tomorrow or it could extend indefinitely (cue the old saying that “the market can remain irrational longer than you can remain solvent”).

With reference to the chart above, Huey has achieved a valid downside target for a robust correction.  But there is also the chance that a retest of the lows of a year ago could lay out ahead.  So, if the Fed does what is widely expected and hikes 1/4 without much antagonistic (dollar supportive) language on forward intentions, we could get a good contrary bounce, as we have been noting since HUI dropped below 180.

The chart above shows the limitations of such a bounce as the top channel line, the SMA 50 and significant lateral resistance all converge on the 195 to 200 area.  Above that 220 is the spot that opens up the discussion of breaking the down trend.  The SMA 200 is at 219 and the November high is the ultimate decider on a new uptrend.

I want to dial Huey out to the big picture to add some perspective.  This is the chart we used during the bear market to note very long-term support (at around 100, which was the 2010 to 2012 H&S’s ultimate target, and at around 75).  HUI held 100 and rallied strongly.  That rally is now being corrected right to… the mid-Bollinger Band point (currently 172, black arrow) that had resisted the index all through its bear market (red arrows).  This simply adds more perspective to the idea that current levels could prove to be an important low as opposed to just a potential bounce low.

hui monthly chart

Now we have a group of market manipulative central interest rate planners (or bond market followers, depending on how you view them) ready to be introduced into the mix.  They will most likely hike the rate 1/4 point and if they do not go asymmetrical (i.e. raise by a 1/2 or get really aggressive on forward language) the odds favor a pressure relieving bounce in the gold sector.  If they go asymmetrical the other way and do not raise, the dollar could get hammered badly from its lofty heights.

But taking the Fed out of the mix, it will likely not be until we see the big stock rally (and associated risk ‘on’ trade, with measured targets higher-still) begin to crack that a real bull leg would be ready to go in the gold stock sector.  There is some touting out there (from at least one usual, widely read gold-promotional suspect) about how the recent out performance of the miners and silver to gold bodes bullish.  But neither of these indicators have broken trend and in fact are at potential limit points.  I’d take that stuff with a grain of salt.  Those who want to keep people enthralled with this sector (while most others launch upward) will try anything to keep interest up.

Bottom Line

I see bad and I see good.  But for now, I think it would be wise to assume that if (and it is just an ‘if’ after all), the sector rallies post-FOMC, it would just be a bounce to the limiting parameters of 195 to potentially 220, until proven otherwise.  We will follow the macro backdrop with great interest because fundamentally, that will play a key role.  As long as the party atmosphere endures, the gold sector will not be ready for prime time.