The daily chart is shown above, going back to June 2014. The index saw the same exaggerated move higher during the month of January and has been correcting for the last two weeks. Like gold, the HUI is correcting near the top of its preceding move, a very good indicator of institutional support. What makes this chart more encouraging is that after rising 40% (about 150 to 210) in just three weeks, the HUI is holding most of its gains. In fact, the consolidation pattern of late looks like a perfect "continuation pennant," also known as a "bull flag". According to ChartSchool at Stockcharts.com, "Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move." Pretty encouraging if you ask me.
You must keep in mind, however, that the HUI needs to break up and out of the pennant before we can get all excited. If this intermediate bear market in miners and metals has taught me anything, it's not to trust breakouts until they've been confirmed.
I'll use that as a segue into this morning's payroll announcement. Payrolls smashed expectations which, predictably, sent the metals reeling. As I type this pre-market, silver and gold are both down sharply, close to 2% each. No doubt this will drag miners lower today. That being said, the HUI still has room to bounce around the pennant formation without officially breaking down. Based on a 204 close yesterday, the HUI can drop 2.5% and still be cozily contained in the pennant. My point in saying all of this is that you shouldn't trade on a pattern like this until it's confirmed!
So where to from here? If the HUI breaks above 210, then I see the index running to about 230 before it encounters resistance (shown by the horizontal green line). Not only would this mean the continuation pattern is in tact, but it would also mean the HUI would trade above its 200 dma for the first time in five months. With regard to the downside potential, if the HUI breaks below 195(ish), then I would expect it to fall to the 180 level - it's 50 dma.
As I said yesterday, stay patient - the market will tell us where we're going.