When stocks tanked on Monday, the gold mining companies fell with the broad market early.
Then, something unusual happened: Around midday, when the sell-off accelerated, the gold stocks suddenly held their ground and, even better, quickly reversed into one heckuva spirited rally.
The rally came from a critical support area near the 170 level on the NYSE Arca Gold BUGS Index (NYSE: HUI) of gold stocks.
Let me show you why that matters - a great deal. Then, I'll do us all one (or four) better and show you how to cash in on this promising setup.
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Since late 2016, HUI has gone through a three- to six-month cycle of lower highs and lower lows - an altogether uninspiring trend if you're long gold and gold stocks.
But in this case, those downticks to lower lows were very slight. There was no follow-through. As a result, a clear support trendline formed.
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This week, that trendline is at 167.75. It's critical to the outlook, because remember: "The more often support is tested, the weaker it becomes." This support trendline has now been tested five times in 13 months. That means that the potential for a breakdown is increasing.
But at the same time, there's an even more important long-term support zone around 150 to 160. So, if HUI does break support around 167 to 168, I would be looking to buy in that 150 to 160 area for at least an intermediate-term rally.
But what if that trendline at 167 to 168 holds? It looks as though HUI is coming into a six-month and 15- to 18-month cycle low.
A rebound that clears the blue six-month cycle line at roughly 175 this week would signal at least a good-sized intermediate-term rebound. It's too early to tell if this would lead to a major cycle upturn, but tall oaks from little acorns grow. Every big cycle upturn starts with a short-term rally.
The upshot: I would be taking long positions should HUI clear 175 this week or next.
Now, here's where the serious profit potential happens...
Of course, gold bugs love their individual miners. But I'm a chart man, not a fundamentals guy, so don't ask me about how much gold reserves a miner has, or what their cost of production is.
In my view, the charts tell us everything we need to know in that regard: Does the chart have bullish potential or not?
Every week, I review the charts of about 35 junior gold stocks in The Wall Street Examiner's weekly precious metals update. I'm looking for intermediate-term buy points. They've been hard to find in the past year. Most charts have been in bearish trends. That makes it tough to find good entry points on the long side.
Today, I went looking again for stocks that had come down near support and looked good from a longer-term trend perspective.
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I came up with just a few that looked like good buying opportunities, at least for a swing trade, if not the big upturn that gold bugs are expecting.
Here they are...
First is Goldcorp Inc. (NYSE: GC).
It's one of the stronger patterns, because it is trading above its smoothed, 200-day moving average - the dark purple line. It's also above all its short-term cycle lines. It's a buy here, but with a protective mental stop at $12.70.
Harmony Gold Mining Co. Ltd. (NYSE: HMY) is on a short-term sell signal, but its longer-term structure is solid.
It's well above its smoothed, 200-day moving average, and it has been making higher highs and lows for most of the past year. It's consolidating now and can be bought with a protective mental stop at $1.99. It's at $2.24 as of this writing, and if it clears $2.35, it should be on its way higher.
Newmont Mining Corp. (NYSE: NEM) is the biggest boy in the field and has a bullish pattern of higher highs and lows. It is currently testing its smoothed, 200-day moving average and should be a buy here, but with a protective mental stop at $35.50.
Finally, Compañía de Minas Buenaventura SAA (NYSE ADR: BVN) is still on a short-term sell signal, but it has a bullish pattern for the past year. If it holds above or around $14 and begins to rally above $14.75, it should have a nice move to at least test its high of $16.50, and possibly more. I'd wait for it to show a bit of strength and buy on a move above the short-term downtrend line, now at $14.90 and dropping to $14.25 at the end of the week. I would keep a protective mental stop at $13.95.
Trading or owning gold stocks is not for the fainthearted; they're always a roller coaster ride. Most charts in the sector are still falling. But if this is the bottom, and I think it may be, then these stocks look like the best bet to lead the charge higher. Note: You can get all of Lee's charts - and the short and long opportunities they're packed with - in his free Sure Money Investor research service. Charts like these give you a serious edge on the competition, so click right here to start getting them from Lee himself. Follow Money Morning on Twitter @moneymorning, Facebook, and LinkedIn.
