Zak Mir on Gold & The Miners – The Conundrum Continues

One of the big conundrums in the resources space is when we shall finally see a sustained return to form for mining stocks. The worst aspect here is that, depending on how you look at this space, we have no right to expect precious metals to drive higher given the deflationary environment in many major economic zones.

Against this is the idea that after the big bubble burst of 2011 the bulls can argue the fundamental slack has been taken up.

As ever, the charting position of gold and leading UK mining plays offer some additional insight into how to play this challenging space, especially from the less common perspective of the weekly timeframe.

Gold

For instance, on the weekly chart of gold it can be seen how we have a converging triangle formation in place over the past three three years. The technical explanation for the early July knockback for this market was that there was a ricochet off the 2011 support line.

The implied floor is towards $1,250 – suggesting that even if there is a near term dip towards this level over the next 1-2 months, we should not give up on the recovery argument just yet. Such a nightmare scenario would only be on tap with a weekly close back below the 2011 support line. Otherwise, the big buy trigger here is seen as being a weekly close back above the $1,345 peak of last month, a momentum buy signal which even within the context of a fiddly metal such as gold, seems to be worthy of serious consideration.

An extra point to note is the way that the 14 period weekly RSI remains below neutral 50 at 47. This would imply there is no hurry to get in on the long side, at least while the oscillator is stuck below 50. At the same time though, a bounce off last year’s RSI uptrend line at 45 could be enough to flag a new leg to the upside.

Rio Tinto (RIO)

The problem that gold has is that the technical glass appears to be half empty, rather than half full. However, with leading UK mining stocks it is a little easier to take the optimist line. For instance, at Rio Tinto (RIO), the weekly chart shows a consolidation within an extended triangle in place on the weekly chart since the end of 2008.

The parameters of the triangle are currently 3,050p at support and 3,450p at resistance – also the 200 week moving average. The suggestion is that after the extended dithering by Rio shares in recent months and years the best way forward here may be to wait on a weekly close above the 3,450p double resistance level. This is even though the message from the RSI window with the oscillator standing at 55 – well above neutral 50 – is that this is a market poised to break to the upside. Given how long the stock has been blocked on the upside the favoured target for H2 2014 on a break of 3,450p is as high as 4,000p, the former 2012 peak zone.

BHP Billiton (BLT)

On the face of it the current charting configuration on the weekly chart of BHP Billiton (BLT) is very similar to that of Rio Tinto, something you might expect given the common fundamental issues. But from a technical perspective there is a slight difference in the sense that the RSI at 56 is a little higher, and we have already seen an attempt at a major breakout about the 2011 resistance line at 2,025p.

What would help now is a clear weekly close above this number, something which would then suggest an initial retest of post 2012 resistance through 2,200p over the following month, and a 2,600p plus destination by the end of this year as a best case scenario.

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