Gold Green-Lights Miners

The gold miners’ stocks are finally perking up again, after spending months slogging through a grinding correction. Contrarian traders are taking notice, starting to redeploy capital in this high-potential sector. Gold miners’ earnings and thus stock prices are overwhelmingly driven by gold’s fortunes. And the yellow metal’s recent technicals are signaling a mature correction, green-lighting gold stocks’ next major upleg.

Bull markets are an alternating series of uplegs followed by corrections, for every few steps forward there is always one step back. These periodic selloffs are essential for bulls’ health and longevity, rebalancing sentiment and technicals before they get too overheated. Popular greed growing too extreme early in bulls will prematurely slay them. All available near-term buying is sucked in, exhausting capital inflows and upside.

The most important times to trade during bull markets are correction bottomings and upleg toppings. The mission is to buy in relatively-low at the former, then sell relatively-high at the latter. That’s the lowest-risk and fastest way to multiply wealth in ongoing secular bulls. But executing on this strategy is challenging in real-time because these tradable major lows and highs aren’t definitive until well after they’ve passed.

When bull uplegs are topping, greed and euphoria are rampant and traders assume big gains will keep on coming. Selling high requires fighting the herd’s rush to buy near peak excitement. Then later when the subsequent corrections are bottoming, popular fear and despair scare traders into worrying the big losses will persist indefinitely. Buying low necessitates deploying capital when most fret a sector will spiral much lower.

While traders’ collective sentiment driving major toppings and bottomings is ethereal and impossible to measure, it can be inferred through technical price action. Indicators reveal when price levels are getting too overbought or too oversold, flagging likely upleg crests and correction troughs. Gold’s price behavior in recent weeks was very consistent with the latter, a major correction bottoming preceding its next upleg.

Gold’s necessary and healthy correction after its last upleg shot parabolic looked to finally reach maturity as November ended, both in size and duration. All that selling hammered gold’s price back to oversold levels. This doesn’t guarantee gold’s correction is over but reveals high odds for that eventually proving to be the case. This first chart shows gold’s newly-bullish tidings within the context of this entire bull.

Gold’s technicals are superimposed over my favorite indicator of overboughtness and oversoldness, a tool called Relativity Trading. It looks at gold price levels relative to their own trailing 200-day moving average, using a multiple simply calculated by dividing gold’s daily close by its 200dma. When charted over time, this metric tends to form horizontal trading ranges. This Relative Gold or rGold is back into buy territory.

This secular gold bull was stealthily born back in mid-December 2015 when gold sunk to a deep 6.1-year low. The journey higher since has seen four uplegs and four corrections. Gold’s latest upleg that peaked in early August at an all-time-record high proved a monster. This metal soared 40.0% higher in only 4.6 months out of March’s pandemic-lockdown-spawned stock panic! That was an exceedingly-big and -fast run.

As gold shot parabolic in the terminal weeks of that upleg, it soared to extraordinarily-overbought levels of 1.260x its 200dma! That rGold indicator hadn’t seen such crazy extremes since September 2011, only a couple of weeks after gold’s last secular bull peaked. I warned about gold’s mounting overboughtness in late July. Such stretched technicals and overheated bullish sentiment meant an imminent correction loomed.

That indeed soon came to pass, as the exceptional popular greed fueled by those big gains sucked in and exhausted all-available near-term buying. So sellers soon gained the upper hand and forced gold lower, rapidly at first. Gold plunged 7.5% in just three trading days out of its early-August peak of $2062, rapidly collapsing back to $1906!But corrections aren’t fast and linear, they surge and retreat much like bull uplegs.

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