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Bring On the March Madness- Gold Stocks in Focus

Summary:  US Equity gains look to continue in the short run following S&P getting back over key resistance near February highs over the last couple trading days.  But if this is truly an oversold bounce within an existing bear market, the risk/reward at current levels after an 8% bounce with little or no consolidation now looks sub-par.  The negative issues of this bounce being largely "Short-covering" and not real Buying remains a concern, along with recent US Dollar strength, and the fact that the highly correlated assets with S&P such as USDJPY, TNX, WTI Crude along with broad-based indices like the NY Composite really haven't broken back above former lows to think this pullback has run its course.  However, on the plus side, we've seen some improvement in the Financial sector of late, along with outperformance both in Healthcare and Consumer Discretionary, two groups which have been some of the biggest laggards this year.  Additionally, Breadth has taken a big turn to the upside of late, something else that's constructive along with the Percentage of stocks trading above their 10, and 50-day moving averages moved to the highest level of the year.  In the near-term, these bullish shifts in momentum coupled with the technical improvement in European indices like SXXP, SX5E in breaking out above their 3 month Downtrend along with bullish seasonality argues for for a near-term continuation higher.   But selectivity will be absolutely key given the 8% gains in a short period of time, with little or no consolidation.

As March madness gets underway this year, there seem to be plenty of fitting, interchangeable themes outside of just Basketball..The warm weather, the US political race orjust how unpredictable the market has been over the first eight weeks, defying expectations at every turn.  Early year steep selling was just as unanticipated by most as was the subsequent rally, which still arguably enough, hasn't been enthusiastically embraced after 7-8% gains straight up from early month lows.   Global interest rates continue to trend lower, with many having gone negative,  while the US remains one of the sole nations fighting the trend of monetary accommodation after the first rate hike with the next meeting set for 3/16.  Yet, if Fed Futures prices are any guide, along with what Treasury yields and Financials performance might indicate, we're still likely a ways off from any further hike of any sort.  

One group which has begun to shine of late and really deserves some further study, is the Precious metals stocks, with gold set to make its sharpest rally in the month of February in over 4 years .  Much of this had to do with the US Dollar turning lower along with Treasury yields, something that over the last few years has consistently resulted in Gold strength(See March-May) or July into October- (A seasonally bullish period when precious metals tend to outperform sharply. ) One could also cite reasons such as uncertainty over Central bank efficacy as being a reason for investors to flock to Gold, during uncertain times when rates are plummeting towards negative territory while the US Dollar is weakening.  Technically speaking, the surge in Gold and Gold stocks looks important, and more than just a temporary blip before gold pulls back to new lows.  Weekly momentum using common Technical gauges such as RSI rose to the highest levels since mid-2014 on the recent Metals surge, as prices broke out of two-year downtrends from 2014,  while Gold and Gold stock ETFs are arguably near key upside resistance which might allow for some backing and filing before a larger rally happens into this Fall.  Near-term, daily charts show GDX to be stretched, with momentum diverging negatively.  However, given the improvement in momentum on weekly charts, any pullback should constitute a buying opportunity for the months ahead.   If Gold can successfully get over 1250 in the next few weeks, this might argue for the stocks to continue higher near-term, despite the overbought conditions.  However, Technically, it's wise to hold off on initiating too big of a position at current levels until consolidation occurs from a trading standpoint.   Thoughts and charts on Gold, GDX, XAU technicals along with patterns and targets in stocks like NEM, ABX, AU and FCX, are found below.

S&P 500
Short-term Thoughts (3-5 day) Bullish- Last week's thoughts of a pullback proved to be wrong by end of week, with S&P futures rebounding sharply along with Crude oil, making a two-percent, 80 point gain back up through February highs into early last Friday.  Despite the pullback from Friday's highs, there was some structural progress in getting back over 1947 in S&P Futures, along with having recouped 1963 in SPX cash, which represents a 50% retracement of the entire decline from last November.  Dollar/yen showed evidence of making a short-term bottom, while Crude remains very much range-bound after three separate failed breakout attempts in the last seven days.  Europe's SXXP meanwhile exceeded 325 and SX5E reclaimed 2900.  While upside might be limited at the area near former Breakdowns from December and a 61.8% retracement of this selling from November highs, (1993-SPX), the cycles don't look to have caused any type of stalling out at 2/22-3 while prices closed at new weekly highs.  So it's difficult to fight the near-term trend here until we have greater evidence of trend reversal, though upside likely does find some type of important resistance at 1975-1990 which will be the true "Make-Or-Break" area to this bounce.


Intermediate-term Thoughts (6-8 Months): Bearish- Despite the bounce we've seen over the last few weeks, trends remain negative from early January, and despite the chance for stocks to rally a bit more in the near-term, thelonger-term momentum remains pointed lower, with many indices such as Transports, or Small-caps having broken down into Bear market territory with longer-term momentum indicators having reached the lowest levels in years.   To reiterate the thesis, increasingly the selectivity which began in the middle part of 2014 within the Small-cap arena has spread to affect both Mid-Caps and Large-caps, where many of the former winners have now turned down to mirror the weakness which was formerly only seen in the Small-cap arena.  Overall, given the length of time without a 20% correction, which lags only 1990s and 1920's while suddenly our raging bull from 2009-2014 has given way to signs of consolidation and selectivity (last year), followed by fairly aggressive early year selling in January to start an Election year.  Given that the first five days of January along with the January as a whole were both negative, this suggests that this year's returns likely will prove far more muted than that seen during typical Election year cycles.  While it doesn't preclude stocks finishing the year positive, it does suggest that gains for the year likely should be subdued.   Downside targets for SPX lie near 1600 which should come into play once recent lows at 1820 are violated.. whichfor now, looks premature.

Gold's rally has reached a critical make-or-break area on the upside which represents three-year trendline resistance from initial range highs created back in 2013.  Looking back, this was the year that the two-year decline ended, giving way to minor downward consolidation.  The $200 point rally since last December has now helped Gold achieve the best monthly gains since 2012 along with challenging key trendline resistance up near the initial highs created back in 2015.  The ability to climb back up above 1250 in the days/weeks ahead would help Gold begin a further ascent up to 1305-10, and eventually $1450 which is likely on an intermediate-term basis given the uptick in momentum on this surge over the last two months.  Pullbacks down under 1200 would argue for a turn back lower to near 1150-75, which would postpone this advance, and allow for consolidation before this rally up to 1305 gets underway.  Overall, gold is seen as intermediate-term bullish based on the surge in momentum, regardless if price still needs to make some further improvement to bolster the intermediate-term trend.

Gold, when viewed on a shorter-term time scale, has formed a triangle formation based on the consolidation that's taken place since early February.  The recent higher lows and lower highs should result in a pickup in volatility in the weeks ahead when this Triangle is broken, which would occur on a move back over 1250 to the upside, while 1200 remains the key area on the downside that's important.   Breakouts back over 1250 are seen as more likely given the traditional follow-through out of these triangle formations, and constitute not only a move back above triangle resistance, but also above three-year trendline resistance as well.  Such a move would spark acceleration up to 1305-10 in the short-run.

GDX has witnessed a sharp breakout following its move above $15 which took it higher by nearly 30% up to $20 within two months' time.  At current levels, prices have begun to stall out a bit in the last few days, couple with negative divergences in momentum which could result in minor pullbacks to correct some of recent gains down to $17 or even $16.12 before additional rallies occur.   The larger area on the upside near $20.50 remains important on gains, and any pullback in the days and/or weeks ahead down to initial support would be used to buy.

Gold, when viewed on a relative basis to S&P, has shown a sharp breakout over the last two months that has exceeded the mild downtrend from 2013, making gold a likely better intermediate-term bet than Equities potentially in 2016.  Pullbacks in the weeks ahead would be used to add to gold, in thinking that Gold should show further relative appreciation to the SPX and relatively outperform given this breakout.  While some might argue Gold is overbought after a $200 point rally since mid-December, the extent of the move off the lows in relative terms is quite constructive in how Gold has exceeded this relative trendline, arguing for additional intermediate-term strength for Gold, and precious metals as an asset class.  

Similar to the Gold Miners ETF, when looking at XAU, we see a sharp rally in the Philly Gold and Silver index, which rose more than 70% in the first couple months of 2016 which has moved quickly to the highest level since early last year.  Minor pullbacks to alleviate overbought conditions are possible given the degree that XAU has rallied in the last few months, but should be used to buy for additional upside given the amount of technical improvement in momentum in recent months.

10-Year Treasury Yields have begun to show minor signs of stabilization after breaking downtrends from late last year by a small amount in the last two trading days.  Movement back up over 1.85% initially and then over 1.92 would allow for an above-average Treasury selloff where yields could reach 2.02%.  However, given the extent of the yield damage, rallies should face strong resistance between 1.85 and 1.92 which would serve as a "wall" to Yield gains and allow for movement back lower.  Given that Gold tends to work better as TY yields have dropped in recent months, the yield decline from late 2015 coincided directly with the Gold spike and then as yields got oversold and began to consolidate, Gold did the same.  Minor yield spikes to 1.90-2 might coincide with a bit more weakness in Gold, yet the trend remains very much lower for yields, so bounces very well could prove short-lived.

Newmont Mining (NEM- 25.35)  Near-term stalling out looks probable after the sharp $10 move in shares which equates to a near 60% rally in the stock before stalling out over the last two weeks.  Momentum remains overbought and waning, as might be expected, and pullbacks down to $22, or $20/60 where NEM broke out in early February, would be a much better risk/reward area to buy into this advance, vs. attempting to follow this recent move.  Former highs from early 2015 along with 2014 both peaked out near $27.90-$28 which should be strong resistance to gainsin the near-term, in the event that NEM does NOT peak out.  However, the four-year downtrend has officially been exceeded, and should give rise to intermediate-term gains, as Gold's rally progresses.  For now, the risk/reward appears limited for the shares in the short run. 

Barrick Gold (ABX- $13.53) Bullish, but overbought, and could stand to pullback to lessen some of its recent surge before the uptrend continues.  Looking back, ABX has nearly doubled in the last six weeks, recapturing 50% of the entire selloff from 2014 highs near 21.45.  The weekly chart above highlights this rise in the context of the intermediate-term pattern, which makes the move look far less substantial, given that ABX traded over $50 back in 2011 and lost 90% of its value into last September's lows.  At current prices, the risk/reward looks limited in the short run, with targets found either at $15.50, or near current levels, as 13.70 lines up with former highs hit back in April 2015.  A zone of support that looks appealing to buy dips lies near $10.18 up to $11.18 in ABX, which equates to a 50% selloff from mid-January along with a 38.2% retracement from its September 2015 lows.  Upon any sort of meaningful pullback in the weeks ahead, ABX would be attractive to initiate technical trading buys based on the surge in weekly momentum, which has taken ABX quickly to the highest levels of overbought in more than two years.  While near-term overdone, this looks to be bullish for this year as a whole.

Anglo-Gold Ashanti Limited-ADR- (AU- $12.15)  Similar to ABX, the surge in Gold stocks of late has helped AU to double in price in the last few months, in this case, from lows in November 2015.  The stock's structure has changed for the better on this move, yet is very overbought in the short run while testing the area near early 2015 highs.   Also, similar to ABX, this rise has helped AU to recoup 50% of the entire decline since 2014, which adds to the importance of current levels.  While the breakout above one-year trendline resistance should eventually help this stock get back to highs achieved in 2014, its near-term prospects might be limited to near $14.25 before this retreats back down to near $10, a good level of support near late 2015 former swing highs which should provide reasonable areas to buy dips.

Freeport McMoran (FCX- $ 7.43) When looking at FCX from purely a technical level, it would appear that current prices should represent strong overhead resistance as part of the downtrend intact from 2014.  The stock's gains have neared former lows from 2015.  Until FCX can manage to exceed this downtrend which has been intact over the last couple years, the trend is down, and profit-taking looks better from a trading perspective than buying into recent gains, as FCX has advanced more than 100% just in the last six weeks alone.  While this natural resources company stock has stabilized over the last few month, similar to the price of Copper and other metals, additional strength is necessary before arguing for too much more upside in the short run.  Two scenarios are possible:  A) FCX pulls back down to $5, helping to alleviate recent overbought conditions, then moves back up over $8, which would jumpstart a larger rally.  orB) A move over $8 happens right away, based on a continued surge in Gold, Copper and other metals, which would cause FCX to break its downtrend, causing Short squeezes in a stock where 18% of the Float is Short, while allowing "Breakout buyers" to attempt to "ride the wave" of the move above this downtrend.  For now, it looks more likely that near-term weakness should happen initially, but upon a weekly close above $8, it becomes far more attractive technically to attempt to follow this trend, postponing any consolidation.  For now, it's worth mentioning that momentum has jumped enough to make this stock worth watching and considering action in the near future, technically speaking, whatever scenario takes the forefront.


Disclaimer:

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice.   Newton Advisors, LLC has no duty or obligation to update the information contained herein.   Further, Newton Advisors, LLC makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.  The information provided in this report is based on technical analysis. Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer. The investments discussed or recommended in this report may not be suitable for all investors.  This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.   

Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investorsNewton Advisors, LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.  From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: NEM, AU, ABX, and/or FCX,  This report, including the information contained herein, has been prepared exclusively for the use of Newton Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Newton Advisors, LLC