If you notice on the chart, the region marked as the "GAP and GO" - That constituted a gap higher above the former all time high ( A very bullish development). Normally, on a subsequent price reaction lower, one would like to see this gap region function as a level of chart support which sees the buyers come back in and bid prices back up again. That is indeed what did occur the first two trading days of this week. Price moved down through the gap on both days, but then recovered prior to the closing bell with the market closing either at the high end of the gap or just above it. However, Wednesday of this week saw this sector succumb to a large amount of selling which pressed it lower throughout the day and prevented it from recovering near the closing bell as it had done the previous two days. That bode for further weakness in the next session and that is exactly what we did get. Thursday saw a sharp spike lower across the entire sector; however, buyers showed up in large numbers, so much so that they took the price all the way back to the opening level. That is bullish price action.
What I am taking notice of is the fact that this spike lower took the index back down to a key technical chart level, 580 to be specific, a level which had effectively held the mining shares from moving higher for the better part of this year. According to the basic premise of technical analysis, a broken resistance level undergoes a change of polarity and should then serve as a level of chart support on any subsequent retracement lower in price. Today's gains on top of that spike off of the 580 level substantiates the 580 level as a critical chart support level.
You will notice that the same gap region, the GAP and GO, which formed early this month, and then subsequently failed to hold prices on the way lower, served as a resistance level to today's move higher in the shares. That too is technically significant. What these shares now need to see from a bullish standpoint, is for this former gap region to be bested and for prices to rise through this level and then hold above it. That would set the index up for another test of the recent all time high.
If the index cannot get through this former gap region, then the most likely path for it moving forward is a period of consolidation with the 610 level capping gains on the upside and the 580 level attracting buying on the downside. Such a development would signal that we are going to try a period of base building before attempting another assault higher.
