What a difference two weeks can make in the precious metals markets. Going from a confirmed downtrend to an uptrend—at least on the short term basis—was rather swift and didn’t leave much time for one to reverse direction to get back in sync with the new uptrend.
At this time, the rally is still in its infancy and there is more work to do, but there are some positive things that have taken place over the last two weeks, that could perhaps show us a major turning point taking place in the precious metals sector. As always, it’s one step at a time with each step confirming or not confirming the price action. In this Report I would like to look at the HUI to see how things have changed over the last two weeks.
The first thing we need to see is a higher low to even consider whether an uptrend is taking place. Below is a daily line chart that I showed a month or so ago that shows the big, long, black-dashed support and resistance rail, possible neckline, that defines the positive or negative trend for the HUI. Below is negative and above is positive.
At the time I showed this chart, there was no right shoulder in place because the price action was declining after hitting that big S&R rail. Right now you can see the June low is higher than the December 2013 low, which is the first sign of a possible new uptrend taking place.
I’ve added some smaller black-dashed horizontal lines that show how the support and resistance lines have been working . The HUI has now rallied back up to the 236 area where it’s finding some very short term resistance. The perfect breakout scenario would be to see the HUI rally above the last horizontal resistance line at 236, hit the big S&R rail or neckline, back off to the 236 area and make a run above the big S&R rail. I would then consider this to be the completion of a one year inverse H&S bottom.
The potential neckline is now at the 250 area. This is the most important number to watch for a breakout and confirmation of the bottom and a signal that a new uptrend is underway. There is a very bullish setup with the RSI indicator at the top of the chart that shows us a hidden bullish divergence. Note how the RSI made a lower low in June vs the December low, while the HUI made a higher low in June vs the December low. This is a very positive sign for the HUI.
Next I would like to show another very important support and resistance line on the long term weekly chart, that showed the initial H&S top several years ago, right after we opened Rambus Chartology. The top neckline #1 shows the support and resistance rail starting all the way back in 2009 and which didn’t end until the HUI finally broke below it for good in November of 2012.
The red arrows show how it acted as resistance and the green arrows show how it reversed its role to support once it was broken to the upside. Note the breakout from the upper neckline #1 that looked like the smaller H&S was complete and the new bear market was beginning. If you’ve been in the markets for any length of time you know there can be false breakouts for even the best looking patterns.
As you can see, the price action fell down to create a double bottom that looked like it was going to negate the upper H&S top. The purple arrows show the price broke above neckline #1 but quickly burned out and reversed and declined back below neckline #1. This is how the markets talk to you.
Once the price action traded back below neckline #1, we went short gold since the HUI was trading back below the support and resistance rail which ended up creating a bull trap. The rest is history, from that bull trap just above the S&R line. From that point forward, the bear market really started to accelerate to the downside.
Let's now fast forward to our recent bottom. You can see how the red arrows have been holding resistance for over a year. What has developed over the last two weeks: last June's low and our current low this June are at the same level with the December low which appears to be the low for this bear market so far, creating a possible inverse H&S bottom.
I’ve labeled the December low a bear trap because that’s what it's been so far. As I’ve pointed out many times in the past, when you get a false breakout it's usually the final washout phase before the price action reverses its trend and moves strongly in the opposite direction, leaving many behind who failed to see what took place.
This next chart for the HUI is a shorter term daily look, showing just how fast the HUI went from a bearish setup to a bullish setup in two weeks time. First let's focus in on the blue falling wedge that had a breakout accompanied by a breakout gap which looked very promising.
At the time the falling wedge became apparant, there was a parallel downtrend channel made by taking the the top black rail of the now bullish falling wedge and adding it to the late March low. Also notice the brown shaded support and resistance zone that had been working very well defining when the HUI was positive or negative.
Once the HUI broke below the bottom blue rail of the falling wedge and the brown shaded support and resistance zone, it seemed promising to assume that the price action was headed back down to the the December low. After the initial breakout, the price action chopped around for a little over a week, consolidating the drop-out of the blue falling wedge. Nothing looked abnormal at that point.
The first real sign that something was amiss with the downtrend occurred when the HUI gapped above both the blue rail of the falling wedge and the top rail of the black falling wedge. That was a major red flag for me since that wasn’t supposed to happen. When something that isn’t supposed to happen, happens, one needs to take a good hard look at the new situation with an open mind, which is exactly what I did.
Note how the second day's price action, after the breakout from both falling wedges, rallied all the way through the brown shaded support and resistance zone which should have been strong resistance. As you can see on day number three of the breakout, the HUI traded at the top of the brown shaded support zone which now had reversed its role from resistance to support over the following four days.
The 50 dma also came in at the top of the brown shaded support and resistance zone to offer its own support. That’s all I needed to see to then go long the Direxion Daily Gold Miners Bull 3X Shares ETF (NYSE:NUGT) on June 13th along with the VelocityShares 3x Long Silver ETN (USLV). As with any market discipline, one needs to have confirmation of a trend change before you invest your hard earned capital.
Next I would like to show you the complete history for the HUI, which shows all the consolidation patterns and impulse moves during its secular bull market. I have said this many times in the past, but it bears repeating: precious metals and precious metals stocks create some of the best looking chart patterns of any sector out there.
Note the beautiful blue triangle consolidation patterns that formed during the HUI’s bull market years up until the 2008 crash. The red arrows show where the actual impulse moves began at the last reversal point in each consolidation pattern. Notice the beautiful H&S top in 2008 that led to the first real correction for the HUI.
Next you can see the massive H&S top that has led to our current low. What I find potentially very bullish is where our current and potential inverse H&S is forming. Since the December low last year—which is the head portion of the inverse H&S bottom—the bottom rail of the major uptrend channel has just made its second low, which is in fact a higher low—the June 2014 low on the bottom rail.
This one year inverse H&S bottom is forming exactly where one would want to see a reversal pattern like this form. Note the RSI at the top of the chart that is showing a very large bullish hidden divergence. It’s also showing a series of higher highs and higher lows.
When looking at the indicators on the sidebar you can see the price action on the blue histogram has just moved above the zero line and the MACD has just had a positive cross. The slow Stoch has just crossed and is now above 20. 
Below is just a simple weekly candlestick chart for the HUI that shows the inverse H&S bottom that has been developing for a year now. There are a lot of ways to use candlesticks but I like to use the black and white candles to show me when a stock is in an impulse move.
When there is a strong impulse move down you will see a string of black candles; When a stock is in a strong impulse move up you will see a string of white candles on the weekly and especially the monthly charts. This week marks the third week in a row now that we’ve seen a white candlestick. One last note on this chart. As you can see, the June low in 2013 and our current June low happened at the same price with the head portion of this potential inverse H&S bottom. That would make it the bear market low made in December of last year.
There has been a 6 month time cycle in the PM complex that has been around since the beginning of the bull market. Sometimes it gets out of whack a bit, but I always look for trend changes during June and December.
This last chart for the HUI is a long-term, weekly look that shows a roughly three year time cycle. If the HUI is truly embarking on the next big three- year rally cycle then we’re going to see some very strong rallies followed by periods of consolidation that will make it hard to ride the bull. We may not pick the absolute high or low—nobody does—but with Chartology on our side we will be able to look for clues about what to expect next from the different chart patterns. I’ve moved the black three year rectangle to the right just a tad so you can see our June low. I have just one simple question to ask as you look at this chart below.
What if this is THE BOTTOM?
