The stock market as represented by the S&P 500 remains strong, with the potential for a small pullback. Gold and silver are more interesting, as they are technically poised for a major advance. 

First, the S&P 500 remains strong, trading near the top of a 6.5-month rising channel. I have noticed that when scanning for strong stocks, nearly all the quality candidates have already blasted off. This means I am noticing fewer great swing trading opportunities right now despite the strength in the stock market. Most of my prior trades are nearing profit targets as opposed to nearing entry points.

Scanning or filtering is a form of analysis in and of itself. With fewer trades popping up it lets me know that the market may need to take a breather. A lot of stocks need to experience a pullback or a consolidation before I would consider getting involved again. This translates to the indexes as well. While we could head higher, I expect to see a modest 1% to 5% pullback in the S&P 500 over the next couple of weeks. I’m thinking more of a 1% to 2% pullback given the strength of the technicals right now. That would drop the price right to that upper horizontal blue line, which is the former highs. Prices often pullback to retest old highs after breaking out.

The advance-decline lines for the NYSE (shown above), small caps, and mid-caps are all at new highs. Lots of sectors have broken out or are on the verge. The market looks good.

Gold and Silver Outlook

Gold and silver are far more interesting and are set for a potentially big opportunity. These metals are at a make or break moment.

Gold and silver both just undercut their prior lows in their 10-week pullback. This following a very flat and tight trading range in gold. This could be a washout or false breakout that causes any weak players to exit their positions on abandoned hope. Once all the weak players are out, the price rallies as the strong/convinced players buy more and the people who just sold rush back in out of regret for having sold.

That is one thing that is possibly playing out. But we also have the simple fact that markets unfold in an impulse wave-correction-impulse pattern. Through the summer of 2019 gold rallied…a big impulse wave to the upside. All price action since September has been corrective, very small waves in no way indicating the impulse wave direction has changed. The next impulse wave—the big wave—is expected to be to the upside. It is rather rare to see a large up wave and then a slow drift lower only to be followed by a sharp drop. Usually, such a pattern is followed by a sharp rise. That is not to say a drop couldn’t materialize and a rally never comes, but it just isn’t very common in this type of context.

If we look back to the last big gold and silver rally which occurred from 2009 to 2011, pullbacks during that rally lasted between 9 weeks and 16 weeks, with the most common occurrence being 10 weeks. The corrections that look most similar to our current one lasted 9 weeks and 10 weeks.

We are currently 10 weeks into the current correction in gold and silver, and about to enter week 11. Based on time and historical precedent, this market could be ready to move. I don’t put a lot of emphasis on this “time” based analysis, but in many stocks and commodities, I have noticed that they need a certain amount of time to “digest” before the next big move occurs. I think that the digestion period is coming to an end.

Finally, what is more, important to me is the gold and silver miners, the stocks. They often move as much as 10x the price of gold/silver, so that is what I usually trade.

Traders can look to individual names exhibiting relative strength, or they could trade a basket of stocks. The gold miners (GDX) and silver miners (SIL) ETFs are a couple of choices. There is also the junior gold miners (GDXJ) and the junior silver miners (SILJ) which tend to move a bit more than the prior ETFs mentioned. The miners typically lead the price of the metals, meaning that GDX and SIL may bottom and top before the metals and also tend to outperform the metals during major advances. SIL has been massively outperforming silver lately, a sign that buyers are buying up stocks in anticipation of a metals rally. GDX has also held up quite well. When gold recently created a new low during the pullback the GDX/GLD ratio remained well above prior lows. Again, a sign of strength in the industry. These ratios tend to rise rapidly during major metal bull markets.

To find gold and silver stocks that are performing well (this is where I focus my efforts…I don’t like to buy laggards) you could sort the stocks via proximity to their 52-week highs. We know that gold and silver are both well below their 52-week highs because they have been pulling back. Therefore, stocks that are close a 52-week high are showing relative strength. Look for breakouts to the upside from consolidations or other chart patterns. Here are a bunch of metal-related Canadian and US stocks sorted by proximity to their 52-week highs.

Chart courtesy of StockRover.

Happy trading. I think the gold and silver trades are about to get real interesting. The stock market still looks strong overall, but I think there are going to be a lot more opportunities if we get a small pullback.