Here is a weekly chart of the Amex Gold Bugs Index (HUI) since late 2002
Based on the historical performance of the HUI, you can see that it has 6-12 month rallies followed by consolidation periods of up to 2 years. The financial crises a few years ago is clearly seen near the end of 2008, but a quick recovery is seen shortly after the selloff.
The HUI has been in a ~1.5 year consolidation pattern which may be ready for the next 'leg' up. Fundamentally, miner earnings are up with Gold trading over $1550 an ounce over the past year and Silver over $30. So why isn't there speculators with the Gold and Silver stocks?
* If your in the camp where Gold is in a bubble, why would you or your company invest in a mining stock?
* If Gold and Silver bullion is in a rally, why not buy the bullion ETF's and take out the miner risk?
* There are many other areas to invest in and get solid returns, other commodities like Oil, Corn, Sugar. Certain stocks in the S&P 500, etc. There is also less risk compared to mining stocks.
But, when solid earnings and announcements of increased dividends are paid out, more speculators will enter this market and push the HUI higher. Technically, it needs to break the downtrend line near ~565.
Then break above the last high produced last September of around ~638. I have a projected target of ~735 once the breakout occurs. The projection is based on the 2003 fibonacci high and low points for that year seen in the weekly chart above. You can also see that the 261.8 fib level is support right at ~500 which the HUI has touched and bounced off of quite a few times over the last 1.5 years.
Can you profit from knowing this? IMO, yes. I am personally invested in various Mid tier and Junior mining stocks, all of them are in production and have earnings. I believe that this will have the best returns. Swing traders should have a really good year if and when this index starts to rally. We may see it before Man/June and another rally in late August/Sept. That is contingent upon the entire financial markets staying afloat...
For those that want less risk exposure to the miners and still want to get into this sector, the GDX and GDXJ are a good start. Silver miners only ETF is SIL. There is even a 3x leveraged mining ETF for those hard core bulls: NUGT. (This is one that you may need to keep a finger on the mouse button)
Disclosure: As of this writing, I do not own GDX, GDXJ or NUGT.