Bombed out miners begin to outperform metals, hint at rebound

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For resource investors, the last few weeks have been downright treacherous. Gold has been ravaged, plunging nearly $80 an ounce since its April highs. Platinum is almost 13% off its highs. Oil has fared even worse, slipping 17% in two months. And lest we forget, silver has fallen a record 15 days straight, with a current loss of 14%.


However, I see a light at the end of the tunnel as many commodity stocks are beginning to outperform the underlying metals, an excellent indicator of a coming upturn.

We glean another bullish hint from the chart of the Market Vectors Gold Miners ETF (GDX*US), for here we can see that this latest correction saw its RSI bottom at or around 30. The 30 RSI level is what marked the bottom in the last two major corrections which then reversed and rallied between 15 and 20%.

What's more, silver stocks have been outperforming the price of silver, and that is also a good indicator of a turn. On the chart below we can see the Global X Silver Miners ETF (SIL*US) went on a 17% run once it began to outperform silver in March. And, of course, back in December, after the same trigger, the silver stocks in the ETF rallied nearly 30%.

With silver stocks often more leveraged than gold, this deep correction may be a great opportunity to buy low and cash in once the rally fully blossoms.

A few interesting opportunities present themselves:

Endeavour Silver (EDR) has held its own over the last 2 weeks of this vicious silver correction and for good reason. They recently posted a strong quarter, have a warchest of $70 million in cash and with three mines in production, look forward to another 3 mines coming online over the next 2 years. Shares have held on 8-10 tests of support and look poised to turn on the jets when miners rally.

Northern Dynasty Minerals (NDM) has given our readers a nice gain since our recent re-buy around $2.20. Our re-entry was necessitated when our stops were tripped during a heavy sell-off instigated by vocal short-seller Kerrisdale Capital back in February. Looking ahead, Northern Dynasty is poised to rally thanks to Friday's long sought after news that the US EPA will allow the company to proceed into normal permitting under the Clean Water Act. Shares are undoubtedly volatile, not to mention out of favour in the mining stock community, but my signals forecast the stock is likely to be a big winner by year end. Personally, I like hated stocks in an uptrend, and, of late, Northern Dynasty fits the bill.

Timmins Gold (TMM) is another miner that has been mercurial since its inception. Lately, however, shares have completely shrugged off market weakness and it currently trade at year highs, besting the majority of its peers. What's more, we've seen a huge influx of volume lately, a very bullish sign. One analyst comment suggested Timmins Gold could see 40% or more upside due to the low price it paid for Newstrike Capital's Ana Paula gold project. If shares can close above 61 cents, we could see a major break out occur.

We see this as a nice tradeable bottom for miners, and, given the depths the've plumbed already, we may well see miners rally into month end. It's also worth noting that seasonally, gold tends to bottom in the May-July timeframe and that we're likely to see another terrific buying opportunity for traders once this coming rally has played out.  

Disclosure: Writer owns EDR, TMM.

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