Gary Tanashian's  Instablog

Gold bugs were sent to the woodshed for much of the last year while the regular stock market spent much of its time bulling. This has served two purposes. First the over bullish (gold fever) sentiment profile was cleared out in the precious metals and a over bearish profile was at least partially addressed in broad stocks.

This is a potentially excellent setup for people who made the necessary adjustments last year and now await a continuation of a trend that appears to be in its infancy. Let's look at the big picture view of the HUI-SPX ratio, which shows the severity of the gold stock correction vs. the broad stock market.

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Monthly 'big picture' view of HUI vs. SPX

By trend continuation I mean a follow through to the initial bottoming signals, which are support found at the 50% Fibonacci retrace of the entire bull market (for the ratio) out of 2000, deeply over sold conditions (worse than 2008) registered by the sensitive CCI and STO, which are now above -100 and crossed up respectively.

The ratio is at a resistance area and this is a week where a man who manages market perceptions is holding a meeting of the FOMC. So who knows what lay ahead in the micro term? But what I like about the picture is that the panel indicators became so deeply over sold that they rival not the routine over sold condition of 2008, but rather are in the same condition they were in at the start of the major bull market.

This at a time when gold has been making higher highs and is above support in relation to crude oil - which affect mining bottom line margins - and most other commodities.

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Gold's price in WTI Crude Oil units is above 'big picture' support and constructive for higher levels

Gold is in a bull market in ratio to the stock market, which affects stock investors' desire to buy gold stocks.

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Gold's monthly view vs. the stock market is bullish

Was the correction over the last year was something to be afraid of? Well, tuning out the trend followers (whose primary goal is to always appear right) that were calling an end to gold's bull market in favor of equities (6 months into the trend, mind you) what we see above is a beautiful consolidation down to support. We also see a continuation of a series of higher highs and higher lows.

The correction over the last year was an opportunity to sell stocks in favor of gold once again. That is of course, unless an intact secular trend is about to end. When gold out performs the stock market, players tend to gravitate to the gold stock sector. Here is a 'big picture' look at the nominal HUI.

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Monthly HUI shows phase 1 up, 2 down, 3 up and 4 down

In NFTRH we managed the failure of the big picture breakout into the recent major correction by daily and weekly charts. More recently we have been managing what is potentially an important bottom by those same charts. The charts and other tools tell us that the sector is over bought, but constructive to continue to bull going forward.

But the monthly chart above gives you an idea of how strong the next leg of the HUI's bull market could be, whether it is engaging now per the current view or later, if the current bottom unexpectedly fails. The red resistance zone is key.

The bottom line is that the gold sector did a lot of good, corrective work over the last year and gold looks good technically in relation to other markets, which in turn benefits the gold stock sector. Precious metals are over bought short term, with some signs that argue for caution (notably the CoT structure), but the big picture is positive.

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