Although Gold put in a bearish reversal on Friday and failed to breakout, do not expect the sector (and miners specifically) to begin a significant correction.
When I say significant, I mean something that lasts more than a few days or weeks.
Bull markets often register overbought conditions. Strong markets and strong trends reach overbought extremes. In other words, precious metals attaining overbought status is a good thing.
Gold stocks, as measured by the rate of change in the GDX (NYSE:GDX) advance-decline line over several short periods, registered only the third breadth thrust in the last decade.
A breadth thrust occurs when a sudden burst of very strong participation follows a deep correction or bear market and very weak participation. Note the 15-day, 20-day, and 25-day readings of the GDX advance decline line.
The yellow highlights the performance of GDX following the last two breadth thrusts.
The corrections that followed the breadth thrusts were brief and relatively shallow.
After last week, 100% of HUI stocks closed above the 20-day, 50-day, and 200-day moving averages. Over 90% of GDXJ stocks were trading above those same moving averages.
That kind of strength begets more momentum and strength but does not preclude a rest or a pause.
There are clear resistance levels that could mark the end of the recent move and the start of a sustained correction.
That is $28 for Silver and around the 2021 and 2022 highs for the gold stocks.
Corrections or sell-offs within a new bull market are difficult to deal with because investor psychology and sentiment require more time to catch up. The fear of a big correction or lower lows lingers.
Let’s review the facts.
Gold stocks and Silver have steadily outperformed Gold over the past month. While gold stocks are overbought on a short-term basis, they triggered only the third breadth thrust in the last decade.
Meanwhile, Gold is a hair away from beginning what could be the biggest breakout in a half-century.
Now is not the time to be bearish or bashful.
Right now, I am looking for companies with fundamental value with huge upside potential but not overbought or stretched.