Gold Miners Set Up for a Memorable Trap from These Heights

It seems like an eternity ago, but in the summer of 2009, several months after stocks had bottomed for good after an epic bear market, the S&P 500 was triggering an apparent and ominous head and shoulders daily chart top.

Since then, head and shoulders patterns have failed plenty of times, as is the norm in any bull run but especially in this particular trap-filled one. 

But back then, given the ferociousness and capital destruction during the 2007-2008 bear, those patterns were taken seriously by even the biggest skeptic of technical analysis. 

At first blush, it appeared that stocks were destined to return to their 666 lows from March 2009 on the S&P 500 when that head and shoulders top did indeed trigger in the summer of 2009. 

With bearish sentiment fresh on the minds of literally everyone, despite the surge stocks had enjoyed during the spring months, the triggered top actually served as one of the more memorable traps in recent market history. Stocks stopped going down on a dime, reversed back higher, and literally never looked back. 

Such is the case when a market has truly bottomed--The obvious top off a bear market bottom is the ultimate trap to drive home the point that sellers are exhausted and we are now in a new regime. 

With this in mind, I want to apply that scenario to precious miners. 

Miners were also mired in a vicious bear market for several quarters if not years. But last winter they put in an apparent bottom and subsequently enjoyed a strong rally into summer. 

Since July, miners have been correcting and/or consolidating, including this morning. 

On the GDXJ daily chart, below, ETF for junior gold miners, we have an obvious head and shoulders top forming. Miners are indeed looking a bit heavy here, with recent dip-buyers frustrated. So, seeing the pattern confirm lower initially would not at all be surprising. 

But the larger context we outlined above, related back to a prior bear market and the psychology coming off an apparent major bottom, conjures up the S&P 500 July 2009 example. And that breakdown-reverse-on-a-dime-higher scenario would likely throw the majority out of position for the next leg higher in a gold bull.