Monday, July 6, 2009

The Ongoing Gold Stock Correction

Bulls never want to hear it, but this is a healthy and necessary correction in the senior Gold stock indices. The current correction is more than half-way over by my estimate, but lower prices are coming. See my previous post on Gold stock correction timing as a preview to this update.

I believe the "steep correction" template is playing out as anticipated, which is a 4-8 week "A-B-C" correction consisting of an initial "A" wave down, a "B" wave up and then a final "C" wave down. We were in the "B" wave last week and I am uncertain as to whether or not we have started the "C" wave down. Whether we are still in a complex "B" wave up or have started the "C" wave down will become clear over the next few days. We are now in week 5 of the correction and I think we have at least one more week to go, but it could be up to 2-3.

Here's a rough roadmap of where we are and where I think we're going, using a 6 month chart of the GDX senior Gold miner ETF (since it is easy to trade unlike the $XAU or $HUI):

When trying to time a purchase to catch the intermediate-term bottom in GDX or another senior Gold mining stock, here are some tips to know you are not buying too early:

1. Are we near the 200 day moving average? If not, probably too early.
2. Is the RSI on a daily chart near 30? If not, probably too early.
3. Is the "C" wave down of the "A-B-C" correction nearly equal in price movement to the "A" wave down? If not, may be too early.

The current "B" wave top in GDX is 40.26, so this would put the bottom of the "C" wave near the 30-31 level. If the "B" wave extends and makes another higher thrust upward, then the ultimate "C" wave bottom should be roughly 10 points below the ultimate "B" wave top. The "C" wave will also make a lower low than the "A" wave did.

Not too complicated, I hope. There are no guarantees in stock markets, but this will at least be a low-risk entry point for a trade where it will be easy to set tight stop losses.

Where it gets more complicated is in figuring out if the coming low is "the" low for the whole correction, which is absolutely uncertain. There is no question we could make a lower low in the fall before the next strong bull market leg up. Here's what it could look like:

For me, I'm going to try to buy the pending lows in the senior Gold stocks for a short-term trade, likely using my favorite blue chip Gold miner Goldcorp (ticker: GG) because I like their call option pricing and liquidity. The principles for picking the low in GG are the same as with GDX. I'll be going for a short-term trade to try to make 25-50% in 4-8 weeks, then I will sell out and wait.

I'm in no hurry to buy Gold stocks because: WE ARE STILL IN THE MIDDLE OF THE BIGGEST BEAR MARKET ANY OF US WILL LIKELY SEE IN OUR LIFETIMES! Gold stocks are not immune from downward pressure in general stock markets, so don't be in a rush to buy. I know after reading a bullish commentary about Gold going to the moon any second you're scared of missing "the" move, but there's plenty of time in my opinion. If you're looking for a cheerleader who is always telling you to buy (or sell), you've come to the wrong place. I would short Gold stocks (and I have in the past) if I thought there was good money in it.

I want to use most of my trading capital to go short the general stock markets this fall, as another big leg down in this bear market where big dollaz can be made should occur in the fall. Patient bears can simply place bearish trades now on general stocks of their choice and ride out the bear for another 6-12 months, but I am going to try to time some of the intermediate-term swings. I found a decent template for where the general stock bear may be going that I'll post tomorrow.

Longer-term buy and hold bulls in Gold stocks could either ignore this first low or put a partial buy in at the pending bottom here and a second (larger?) buy near the fall bottom. This will dollar cost average in at a great price. Gold stocks should be done correcting before 2009 is over and then they will make massive gains of 200-300+% in 2010 for the seniors (i.e. GDX) and between 0-1000% for juniors (some juniors will go out of business, which is why the range starts at 0% and you have to diversify when playing the small cap Gold miners).

For those who insist on being bullish right here right now in Gold stocks, I wish you luck. But remember: a stock sector does not make 200% gains without a subsequent rest unless it is at the end of its bull run and we ain't even close for the Gold mining secular stock bull market (we've only just begun). We will get to the mania phase in Gold stocks before this thing is over. I know this time it's a little different, but the biggest gains in Gold miners during the 1930s came after the 1932 stock market bottom, not before it. Cash is an admirable temporary position in a bear market even if you hate the US Dollar.

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