To be sure, there is plenty of work left to do before we can even think that gold and gold stocks are heading back up to their 2011 levels. But even so, there is plenty of room for growth before the comeback runs into serious resistance.

 Back in April, the Market Vectors Gold Miners exchange-traded fund seemed to stabilize, and I wrote here that "…the technical evidence for a new bull market is not yet there. It does appear to be getting close, however." (See "Getting Technical, "Gold and Silver Are Almost Ready to Rally," April 28.)

At the time, sentiment was extremely bearish. When the ETF broke down through chart support in May it became extreme. It was as if everybody expected the market's bottom to drop out. Calls for gold to tumble seemed to be everywhere. Indeed, withdrawals from the popular SPDR Gold Trust ETF continue even now at a rather fast clip as demand diminishes.
But to a contrarian technical analyst, this is bullish. If most investors think gold prices are heading lower and sell their positions, then there will be no sellers left. Supply dries up, and any spark can get the market moving higher.

 The gold miners ETF has already started to make that move. After dropping sharply in mid-May as gold broke down, it immediately stabilized (see Chart 1). In fact, on-balance volume began to rise, indicating that money was starting to flow back into the ETF. Within days, the May plunge was erased.

Chart 1

Market Vectors Gold Miners ETF


In Wednesday's trading, the ETF confirmed its rally by moving nicely above its 200-day moving average.

 From a long-term perspective, we can see a developing bottoming pattern that some may interpret as an inverted, or upside-down, head-and-shoulders (see Chart 2). This pattern spans more than one year with its important lows occurring in June 2013 and December 2013 with last month's bottom likely being the final low.

Chart 2

Market Vectors Gold Miners ETF, Long Term


I am not so sure a head-and-shoulders is the proper label, but despite the semantics there are other pieces in place that suggest the bottom has been made. The most obvious is the shift in momentum to the bullish side. One indicator, the relative strength index (RSI), has been sporting higher lows over the past year. 

 This tells us that the power in the market reverted to bullish hands. Price moves are somewhat stronger to the upside than to the downside.

 We can also see the same pattern and characteristics in the Global X Silver Miners ETF to add even more confirmation to the mix.

 Of course, not every stock in the group offers such good news. But from giant Goldcorp to the much smaller Iamgold there are plenty of candidates from which to choose.

As gold stocks are linked with gold itself, let's take a quick big-picture look at the gold ETF. Starting at the major low set in 2008, the ETF rallied to 2011 and then retraced roughly 62% of that gain at last year's lows (see Chart 3). Chart watchers will recognize this as an approximation of a 61.8% Fibonacci retracement and a level at which demand often re-emerges.

Chart 3

SPDR Gold Trust ETF


If we move further back in time, last year's lows also occurred at the 50% retracement of the rally from 2005. While that was not the lowest point of the prior bear market, it was the low that occurred just before the rally really got moving.

Finally, last year's lows were also at the measured downside target for the break of a large triangle pattern seen in 2011 and 2012. Projecting the height of a pattern down from the breakdown point often yields an objective for the bears.

 With gold seemingly reaching a solid floor and gold stocks starting to make real technical progress, it does seem that now is a good time to take a nibble on the latter.

Again, the proof for a long-term bull market is not in place, and the gold miner ETF has a rather strong ceiling above in the $31 area (it closed Wednesday at $24.77). But the opportunity for profit in the short term seems real.


Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.