Thomas
DeChastelain
Memorial Archives

Gold Sector Chart Update
posted Mar 18, 2006 at 02:07AM

Bullion Daily



To me the ADX indicator is the one to watch. What is being described is a stand-off between buyers who don't want to buy and sellers who don't want to sell. People sold/distirbuted into the last rally. Now they are on the sideline waiting for an escalation in selling. So far though it looks like bullion is in tight hands, and they are going to force people back into the market.

If the green (buying force) crosses over the red (selling force) line, it is a signal that buying, not selling is about to pick up.

GLD Daily



The bullion chart does not update until end of day, so you may want to track the GLD chart as a proxy

Bullion Weekly



The bears are probably hanging their hats on the technical condition of this chart. In phase I of the gold bull this was clearly a juncture to fade any rallies. But the gold sector has broken out of a major consolidation. All of the price action points that we are in a "Phase II" or a "Wave III" type environment.

That means certain indicators that were sure money before will give false readings, or will simply lose thier "predictive powers". In Wave III type bull moves the MACD will diverge negatively over a long period i.e. years). So yes the MACD could oscillate in a downwards trajectory, but the price chart, the one that counts, will continue to trend upwards.

So no, don't ignore that bearish MACD cross-over, but neither should one give it the importance it once had.

HUI-Gold Ratio



At the least I would like the 200dma to hold, preferably the trend-line as well.

XAU/Gold Ratio



This chart ranks high in the bear's hiearchy as well. The move does look impulsive so far. In a "Wave III" environment I cannot see this ratio going below the dotted green line. In other words those waiting for a complete reload, will not get their wish and have to play catch-up. At some point the key resistance will be broken, although that is a ways down the road yet.

HUI Daily



Actually the annotation may not be that clear. The small bull flag refers only to the price action of the last few days. There really aren't enough data points to say it "is" a bull flag, but that is what I think is happening.

Discussion

Well there is certainly enough technical fodder in the charts for both the bears and the bulls to get their teeth into. The sector is in a bit of no man's land, moving up into what is a clearly delineated 50 dma resistance line.

The real problem here is what indicators do you key on, which one have priority? For me in times like this you have to start with overall price action and chart pattern. IN the big picture, the gold sector has broken out of a two year consolidation with a strong impulsive move. The price action suggests that a first impulsive leg has been completed, and we are now involved in a consolidation/corrective sequence.

The long shadow on the candle of the recent low, suggests it is a pivot that will have some legs. The HUI is still below the 50 dma, but so far looks like it just taking a pause to buck off the short term bounce traders before giving this key metric a good go.

If it does jump over the 50 dma I think it will initiate further upside. The other short-term indicator I would key on is the buying strength on the ADX.

Barring open warfare with Iran, I would not see this as the start of a new impulsive leg, just moving upwards in the context of a larger consolidation pattern, a bullish sideways channel or continuation triangle.

Not to take intermarket analyis too far but I think Gold is just doing a smaller degree move, of what crude is currently doing. Crude, right now also looks to be putting in an upward leg as part of a larger degree consolidation. (Basically doing what the gold sector was doing before the break-out). Indeed in the big, big picture I think there is a case to be made that gold and oil are manouvring in sync to stage major "wave III" type moves later in the year.

Trading notes

Right now I think things are going resolve bullishly, but of course that isn't always the case. If the HUI bounces back hard off the 50 dma, and the HUI/Gold ratio breaks support metrics, then the "cosolidation" could be a deep one. Something sufficient to convince a critical mass of people that the gold sector has topped. i.e. a deflation scare. All of the indexes I have looked at don't show anything yet. The only warning signs has been the melt-down in certain Arab markets. Call me cynical but I don't necessarily see that as a bad thing for gold.

However to get back on track, new money should look for good techical entry points within individual stocks, and should have some kind of stop loss, at least until you are comfortably in the green. Do not set yourself up for large losses. Taking a few small hits here and there is easily made up for once you get on the right side of the market. Taking a bigger loss takes much longer to recoup from. As well, because we are in a consolidation, this is not a "timing" call. You want to stay in the green, but you will have to wait I think before real gains are going to present themselves.

Good trading

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