Gold Stocks Slide as USD Index Strengthens – Should You Be Concerned?

Przemyslaw Radomski submits:The precious metals market is correcting. In my previous essay, I summarized that it seems that gold, silver, and corresponding equities need to take a breather to correct their post-$1,000-breakout rally. This is what we’ve seen lately, so the question is how low can we go and what to look for as signs of a reversal.

Precious metals (PM) stocks have been hit particularly hard in the past several days, so this week I would like to cover the situation in this important sector.

The mining stocks sold off heavily in the past two weeks but have now reached significant support levels and the technical situation is now once again favorable. The GDX ETF (proxy for PM stocks) has just reached the 50% Fibonacci retracement level and bounced with a vengeance, which by itself makes it probable that the bottom is already in. GDX closed at $43.80 on Thursday, right at one of the support/resistance lines.

Two of the popular indicators suggest that a bottom is close or already in. The RSI Indicator has just bounced from the lowest levels since the October 2008 low. In other words, according to this tool, the precious metals stocks present a buying opportunity not seen since then.

Another indicator that has been useful in the past in timing bottoms in the PM stock sector is the Stochastic Indicator. It is clearly below the 20 level – at the blue horizontal line – which marked a great buying opportunities in the past.

Were that not enough of bullish signals, the more detailed analysis of the previous breakdowns provides us with one more confirmation. Please note that breaking below the previous support lines drawn from the October 2008 bottom (marked with dashed lines) means that the decline was more or less 50% complete. That is the case also today, which suggests that even if we were to move lower from here, the second bottom of the double-bottom formation would not be much lower.

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