Manic Miners

Well hello again.

Service as normal at Screwtape is being resumed after the emotional highs and lows of last week. By 'normal', I do of course mean 'technical analysis and philosophical discussion of precious metals as presented by five prosimians who like to use metaphors such as crème-de-menthe-drinking dung beetles'. So jolly well normal, in other words. And there'll definitely be no more underhand side-swipes or bitchy remarks aimed at the silverogosphere and its noble hosts.


Actually, after last week's excitement, I am, in all honesty, a bit disappointed to still be slaving away here at Screwtape. I'd been waiting all weekend for a phone call from Gonzalo Lira, whom I was hoping might offer me a lucrative deal to make podcasts for our ready-primed and pliable audience. I spent most of Sunday practicing my radio voice, and waxing lyrical into the mirror about how doom is upon us and silver will make Rockefellers of us all. But Mr Gonzalo 'What do we want? Hyperinflation! When do we want it? Now!' Lira never rang, sadly. Oh well, perhaps he's too busy fixing all the technical issues at his latest venture.

But I'm confident that I'll be asked to do a one-off pod-cast at Turd's instead. Mind you, he hasn't rung for a while either... Sigh... Where can they all have gone...?


Manic Miners

It can't be denied that the miners have not exactly been the best investment of 2012. From the September peak to this year's trough they fell on average 42%. Now that's not good in anyone's book. I'd personally had high hopes for them because the TA set-up looked pretty promising, but unfortunately the required move in gold did not transpire. Then the Eurozone crisis came back with an evil glint in its eye like a badger at an earwig convention at which drink had been taken. Needless to say, what happened to my mining portfolio was directly comparable to the fate of those earwigs...

Fortunately, the miners snapped back with some force in mid-May, and I was able to bail out of some previously pretty hopeless-looking positions. Rule #1 of trading: when your thesis is proven incorrect, get the hell out, and make no excuses about it. That way you live to fight another day. [See KD's excellent post on this, here, although it's his #2 rule. We can't agree on everything, you know..!] This proved to be the correct decision, as our Manic Miners then decided to give up another large chunk of their value throughout June. Currently I have no position in any miners. So is now a good time to get back in? Surely they're pretty good value at the moment, and we're all hoping for a good move in gold soon, aren't we?

Well, my new thesis, which will be tested of course by the only opinion that counts - the market's - over the next month or so, is that jumping back into the miners at this stage would be pretty foolhardy. Here's the chart for GDX, the main ETF for gold miners:

This is a pretty solidly bearish chart, I'm afraid: the downward channel has shown no signs of abating since gold was at its peak in September. There is perhaps some interesting support at 42.50 (and I predict a fall to at least that point, perhaps followed by a short-lived rally), but if that fails - which I think it might - then there's not a lot holding this thing up until back down at the previous low (39 ish) and then the bottom of the channel (36 ish, depending on how long it takes us to get there). Even if it doesn't fail at 42.50, we're then into a pennant situation, which doesn't look set to resolve until at least September. So why buy now, before we know which way the pennant might resolve (and with the added risk that the 'floor' of the pennant could easily fail at any time)?

It's always good to look at any chart from several perspectives, however. A quick Fibonacci analysis shows how strikingly well the decline in GDX has followed standard Fib retracement levels:

This chart could actually go into a Fib textbook. One can easily see the lines of support at each retracement level becoming lines of resistance, and a temporary trading range gets set up between them. Our Manic Miners went all the way down to the 0% retracement level, before rallying hard back up to the 50% level. Its footing then slipped, however, and now it's somewhere in no-man's land, which is not a comforting sign. It's difficult to objectively argue that a rally back over the 50% retracement line is more likely than a fall to (a) support at 42.50 and then possibly (b) the previous low at the 0% retracement. Rule #2 of trading: don't buy in 'no-man's land'...

The outlook is hardly any more promising for the silver miners. The chart for SIL (a major silver miner ETF) looks equally, if not more, bearish:

The downward-trending green line looks powerful in its commitment, and the indicators (RSI and Stochastics) seem to confirm that a move back down to meet the line is likely. Intriguingly, this line will very soon intersect with the full Fib retracement/previous low, and could (could) mark a major bottom in SIL provided that this horizontal line of support holds. If it breaks, however, then a major further breakdown in SIL could occur.


Bellwethers

When trading the metals and the miners, I tend to always quickly glance at a couple of 'bellwether' stocks before launching my trade, even if I'm not trading those stocks specifically at that time. Such stocks are often good indicators of how the broader market is going to move, and to what degree. Of course, they're not always 'right', and each trader prefers her own choice of bellwethers, but I would encourage readers to develop a sense for which stocks are better predictors of larger trends than others.

One well-known one for the PM complex is NEM (Newmont Mining Corp), which makes up the largest proportion of the HUI, in fact. If NEM were telling us that it is about to buck the downward trend, then I might be tempted to sit up and listen... But it isn't:

It's been flirting around the 50-dma for a couple of months, but hasn't broken it with any real confidence. Unless a rally comes soon, then I think the RSI/Stochastics' implication of another move down will be confirmed in the market action, possibly even all the way back to its previous low of the year. If it gets that far, then I'll be a buyer, as the oversold conditions will likely force some kind of rally. But there's quite a bit of downside between here and there, and the corresponding upside is unlikely to take us beyond the 200-dma. That's not the kind of risk-reward equation that turns me on, I'm afraid, and so my hands are staying firmly sat on for the time being.

A curious bellwether of mine for silver and its miners is AGQ - not the double-leveraged silver ETF, but rather Arian Silver Corp. The chart below is AGQ on the TSXV, as that's the one available on Stockcharts, but I prefer the LSE version. The reason I use Arian's chart is partly because I used to trade it (actually, invest in it - it was a company for which I had big hopes, all mournfully dashed), and partly because Sprott has invested heavily in Arian. So, out of all the silver miners, one might expect that Arian would get a bit extra support to its share price if the proverbial were to hit the fan.

Well, sadly that appears not to have been the case. Long-suffering Arian investors have found no real floor to exist in the share price, and each time they think a new low has been put in, they find themselves corrected by the market soon after. On the flip side, whenever there's a strong move in silver, Arian moves like the clappers - sometimes 10% or more in a day - and getting in at the right time can be extremely lucrative. That's why I used to like trading it, and I still do occasionally. But for now, where would you pick a bottom for Arian..?

Unfortunately for longs, this is a wickedly bearish chart, as the 50-dma has recently failed to cross the 200-dma and the two moving averages are now diverging. Lower lows are being put in, and any rallies are quickly sold off (and don't penetrate the 50-dma for more than a day or two in any case). The RSI/Stochastic seem to suggest another move down. The chart's just bloody awful in other words.

It's a shame, really, as it's a good company and it has impressive proven deposits of both silver and zinc. But for reasons I've never quite properly researched, their share price is especially sensitive to the silver spot price. Ironically, owning AGQ (Arian) is almost like owning a double-leveraged silver ETF... I actually wonder sometimes if people are actually trading it thinking that it really is the ETF..! [As an aside, I often wonder the same about RandGold on the NASDAQ (symbol: GOLD) ... But surely no-one's that stupid, are they..?]. Whatever the reasons for it, I've found Arian to be a good bellwether of future action in the spot silver price, and Arian's verdict as of today is 'get the hell out' - both of silver and silver miners.


Conclusion

The GDX and SIL charts must perform a quirkafleeg in order to have any chance of getting out of their bearish formations. This is, of course, entirely possible (as is anything in the markets): a sharp move higher in gold or silver (e.g. due to war in Iran, QE III or a further drop in the US' credit rating) would render the TA null and void, as various important lines of resistance would be smashed through.

But in the absence of such joy for longs it is important to be realistic about the fortunes ahead in the short-term for the miners. More pain, if you didn't sell earlier, and more waiting if you're waiting to get long again.


[FULL DISCLOSURE: I have no positions in any miners, and no plans to instigate any during the next few weeks. I have no position in physical silver. I am long physical gold, but may go short at any time and without notice.]