Precious Metals Complex Reverse Symmetry

In mid January of this year it looked as if another leg down was in store for the precious metals complex. Most of the precious metals stock indexes broke down to a new bear market low which I was expecting, as I was looking for that one last capitulation move to shake out the last of the bulls. There was a pretty symmetrical H&S consolidation pattern that had developed at the lows going back to August of last year. The setup looked perfect for one last move down to end the bear market but that didn’t happen. Instead we got a two day shakeout below the previous low which ended exactly three months ago today.

I have been one of the biggest bears since the HUI put in its right shoulder high in 2012 which was the beginning of the bear market.The actual high was made in 2011 but the first real strong impulse move down started from the right shoulder high. Three and a half years or so was a long time to be bearish on this once thriving sector but when I seen the failed breakout to the downside in January of this year that caught my attention. There is an old expression in the markets that says if you see a false breakout from a well defined pattern, the chances are very good that it was a failed breakout and the price action will move rapidly in the opposite direction, leaving everyone who was on the wrong side of the trade in the DUST.

This is exactly what happened in the precious metals sector. After just two days below the neckline on the HUI for instance, the move back up has been breathtaking to say the least. Both the bulls and the bears were confused as to what just happened. How could sentiment change so quickly from the bottom falling out, to a rip roaring bull market just like that. That’s how many moves end. The bear market was so long and brutal that everyone who wanted to sell finally had their chance. With no sellers left the bulls took charge and a brand new impulse move up began.

We’re now at a critical point where both the bulls and the bears don’t know what to do. The bears keep hoping that they were right and the bear market isn’t really over yet and new lows will be on the horizon. The bulls on the other hand are waiting for a good correction in which to buy their favorite PM stocks in this new bull market but the precious metals stocks just keep going higher without any significant declines. Damned if you do and damned if you don’t.

Lets look at some charts so I can show you what I was looking at in regards to such a major shift in sentiment. These first charts will be what I call a ratio combo chart. The top chart will have a ratio which compares one item to the other, which shows how it’s doing compared to the item on the bottom chart. It’s a little bit like inner market analysis, but is easy to see and understand. How a ratio chart develops can have huge consequences for the underling stock or market.

This first ratio combo chart compares gold to the XAU on top with the XAU on the bottom. The ratio chart on top tells the story of how undervalued the XAU index is to the price of gold. It’s mind blowing when you understand how beaten up the precious metals stocks have been vs gold. For many years the blue horizontal line at 5.10 or so was a good place to buy your favorite precious metals stocks, and when the ratio dipped down to the red horizontal line around the 3.70 area it was time to exit those favorite PM stocks.

Looking back to the 1996 time frame you can see the ratio chart on top put in its all time low at 2.60 while the XAU was putting in another important high up to that point in history. From that important low in 1996 the ratio chart on top embarked on a twenty year parabolic rise in which gold would outperform the XAU, even with the bull market the XAU had in the 2000’s.

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Disclosure: None.

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