Since late 2016, gold and silver stocks had been rallying aggressively but started pulling back in early February. There are still several reasons to remain bullish on gold and silver stocks, which means this pullback could be a good buying opportunity. But if the price drops below key support, it may be best to move to the sideways in this sector.

For a longer-term context, the VanEck Vectors Gold Miners ETF (GDX) is still in an uptrend. The ETF rallied from a low of $12.40 to a high of $31.79 in 2016. That rally broke the ETF out of a long-term downtrend and signaled the emergence of a new (potentially long-term) uptrend. While the retracement in the latter part of 2016 was deep, the prior rally was bigger. The long-term and short-term patterns remain bullish, as long as the price stays above $18.58. If the price declines below $18.54 (allow for a bit of room), it could be falling back to $12.40.

In the short-term, a cup and handle chart pattern has formed between November and March. While more v-shaped than a traditional cup and handle, the rally since December has erased all the losses since November (the cup). As of Mar. 2, the price is forming the handle of the pattern. If the price starts rising above $24.50 that would be a pretty good signal the formation is completing, indicating a rally back up toward the 2016 high of $31.79.

GDX forming short-term bullish pattern

The Global X Silver Miners ETF (SIL) has a similar outlook to GDX. In 2016 it rallied from a low of $14.94 to a high of $54.34. That broke the long-term downtrend and ushered in what is likely a long-term uptrend. The price retraced some of its gains in late 2016, and in 2017 the price has been bouncing again.

The price action between November and March doesn't quite create a cup and handle, as the price has not yet moved all the way back to the November swing high. The Silver Miners ETF has still broken out of a descending channel, though, which is a bullish signal. If the price starts pushing up into the $38.50 to $39 region, it would indicate that short-term selling pressure has tapered off and that the uptrend is resuming. The next target is near $54, the 2016 high. With the long-term uptrend in place, those highs would likely be broken. If the price falls below the December swing low of $30.50, that keeps the price under selling pressure and would put the long-term uptrend in doubt.

SIL breaking out of descending channel for bullish move

The Bottom Line

Gold and silver stocks have seen some big swings over the last year. The rally in 2016 and the decline that followed were both big enough to attract a large contingent of adamant bulls and bears. At this point, the edge still belongs to the bulls. The decline in the latter part of 2016 was only a partial retracement of the prior rally, and the move higher in 2017 has the stocks breaking their corrective channels and forming bullish patterns. Price action reveals all, though, and a drop back below December lows would cast serious doubts on the long-term bullish outlook. The February pullback presents a potential buying opportunity, but wait for the selling to pause and for the price to start moving higher before stepping in.

Disclosure: The author doesn't have positions in the ETFs mentioned.

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