"Gold Stocks Get The Hammer"
We recently published an essay about the relationship of the gold stocks to the metal and believed that the stocks were at a crossroad. They were and still are. We're going to present three charts that you might wish to watch over the days and weeks ahead. If you've been trading the shares for the short term and had been following the recent trend lines, you were stopped out of your positions late last week and took some respectable profits. If you're a long term investor there's not much you have to do as we think, over the long haul, the bull market is acting exactly the way it's supposed to.
Let's examine some charts.
This chart measures the relationship of the HUI gold stocks to gold, the metal. When the ratio falls, stocks are weaker. When rising, the stocks are stronger. We're speculating that the ratio number may find support along the green line. Keep in mind we use the term speculate. It's just as reasonable to speculate that the line of support may not hold. It will be important to keep an eye on the HUI stocks when that support line is met and see what volumes do. You'll want to see volumes in the shares contract as the line is approached and see volume expand should it bounce off. Basically, you want to see more buyers appear at that line and not more sellers. There may be a continuation pattern emerging here and with it potentially an inverse right shoulder will be put in over the next few weeks. We'll simply have to wait and see what unfolds and we'll keep you posted.
Next we will examine the HUI daily chart. The initial buy signal was issued last summer when the 50ema crossed over the 75ema. Based on this model, the gold shares are still on a buy signal for those who entered the market back then. The Aden Sisters have pointed out the importance of support at the 15 week moving average which is essentially the same as our 75ema charted above.
Back this past March we included an Andrew's pitchfork to help determine the March 2006 buy signal. As you can see, the fork still rules. You might be able to see that the lower fork lies right near the 50ema, so that area may hold as support. But the markets are deviant and we wouldn't be surprised if the 50ema and lower fork fail. If that happened, then the 75ema would likely be next to test.
Since the initial buy signal for the current gold shares run started with the 50ema crossing up over the 75ema, we are concluding that should the 50ema cross down over the 75ema that would be a sell signal. Should that occur, the 200ema would become the next suspected area to test.
The MACD histogram clearly displayed the inherent weakness that existed since mid-April even though the prices of shares were rising. Another divergence noted was the declining relative strength of the shares. Negative divergences in the face of rising prices should be respected.
Finally, let's examine the XAU index' weekly chart so that we can get a sense of where we are presently in the bull market since year 2000. A bearish shooting star appeared at Friday's close. That's an intermediate term reversal signal. S2 defines the bullish run the shares have had since May 2005. It will be most important for that trend line to hold and we have no doubt that it will be tested at some point. Should the test fail it would be reasonable to see the Stage II breakout area get tested, somewhere around 120-130.
Therefore, it appears some weakness should be expected ahead for the shares. It doesn't mean that the bull market run in stocks is over. The bull market is alive and well! But the charts do alert us that one would be assuming a higher level of risk by buying mining shares right here and perhaps would be in a better position to wait and see what happens as the support areas mentioned in this essay are tested.
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