Gold's safe-haven rally in jeopardy as equities rebound
Gold and silver have held up well during the recent selloff in equities. From Dec. 28 through Wednesday Jan. 20 the broad NYSE lost 10.4% while the S&P 500 lost 9.6%. Precious metals gained strength during that period. Gold advanced 3.0% while Silver gained 1.7%. Gold relative to the NYSE broke its downtrend and touched an 11-month high. Gold relative to global equities (excluding the U.S. market) reached a two-year high. Precious metals have clearly benefitted from the equity selloff but therefore figure to lose strength as the equity market begins a relief rally.
Equities have become extremely oversold and are forming a bullish reversal. The weekly candle chart of the S&P 500 is shown below. The market is forming a bullish hammer (reversal candle) right at important support. The week is not over but we expect volume to be sizeable. The last two hammers on big volume came at the October 2014 and August 2014 lows. The market became extremely oversold this week as only 15% of stocks within the NYSE were trading above their 200-day moving average. That is the lowest figure in more than four years. Furthermore, various sentiment indicators are showing extreme pessimism. The AAII survey for example is showing the lowest amount of bulls since 1987.
The S&P 500 could rally as high as 1990 where there is major resistance. Wednesday’s low should hold for at least a few months.
The recent poor performance of the gold miners is another signal that the metals (Gold and Silver) are at risk of making lower lows. During the aforementioned period when the metals were positive the miners (GDX and GDXJ) lost 9.6% and 12.0%. That relative and nominal weakness is a strong signal that the recent strength in the metals is unlikely to last.