platinum-group metals (PGMs). The index is comprised of large cap mining companies from around the world including Freeport-McMoRan (its largest holding), Goldcorp, Barrick Gold, and Newmont Mining, among many others. The valuation of mining companies is inextricably linked to the prices of the commodities they produce, there's no way around it. Sure, there are company-specific factors such as cost controls and management, but at the end of the day, much of their operating costs are fixed which means that their ability to generate profits depend largely on the market price of whatever commodity it is they are pulling out of the ground. This is a roundabout way of saying that the DJGSP directly reflects the underlying sentiment towards gold, silver, and PGMs. If these metals start moving up in price, so does the index.
Above is a 5-year weekly chart of the DJGSP. I went back 5 years because I wanted to show the massive head-and-shoulders topping formation that occurred from 2010-2012. Once the neckline broke at around 300, there was a sharp, waterfall decline that lasted approximately 6 months. In July 2013, the index finally found a bottom around 178, representing a painful 61.8% drop from its April 2011 highs. Those of you familiar with Elliott Wave Theory and Fibonacci ratios know the significance of 61.8%. This number often represents natural levels of support and resistance. I'm not an expert in Elliott Wave Theory or Fibonacci sequences, but I thought it was very coincidental and worth mentioning that the DJGSP found support after falling exactly 61.8% from its peak.
Anyway, moving on...As I stated above, the index bottomed in July 2013 at 179. From there, the index has chopped sideways for over 12 months putting in a series of higher lows and lower highs. While the index itself was moving sideways, its underlying momentum indicators were telling a different story. Both the MACD and the RSI, after bottoming in early 2013, began a steady, straight-line ascent which tells me that institutional investors started rotating into this sector. Another important factor to consider is the breakout we saw in June 2014 when the index punched through that declining line of resistance. Since the breakout, the index has made a healthy retracement back to that resistance line which now is acting as support.
All of these factors taken together tell me that a major bottom is now in place and the long-term trend has reversed higher. Look for the index (and miners in general) to continue to move up from here. The bottoming process is often painful, punctuated by sharp swings in both directions so I would continue to expect volatility for a bit longer. On the whole, however, I would argue that we will begin seeing higher highs and higher lows for the foreseeable future, not only in this index, but in mining stocks and the underlying commodities as well.