Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Jul 24, 2004 at 02:29PM

Introduction

There was certainly a surreal quality to last week. Rarely have I observed such a disconnect from the gold analysis I was reading, to what was actually happening in the market.

Well, my reading of the tea leaves says that all is not well. From a technical perspective, one can argue, and I will, that the sector is in its most vulnerable condition since the start of the secular gold rally.

Gold Price Action



Gold Daily



The chart shows a double top, followed by a sharp drop, followed by an overlapping bear channel - which has now been been broken to the downside.

Hardly a text-book entry point.

Gold Weekly



The Aden sisters have identified the 65 week moving average as a key technical support level. When you look at the above chart it is easy to see why. The 65wma has been the final line in the sand for every correction to date.

However, this time may be different. If you look at the three previous occasions that gold reached that level, it did so with dual stochastics completely bottomed out.

That is not the case here. Gold is well within range...but this time there is lots of stochastics fuel for the bears to draw on to force a significant breach.

Indeed the weekly chart above is the main reason for all the ominous language used in the introduction

Gold Monthly



Gold Rand Chart



It may be a good idea to track some SA gold miners as any strength in the face of a dropping rand gold price may be a leading indicator for the entire sector. When that will be happening I cannot say.

The Dollar



The dollar has broken out of a bullish falling wedge. There are several options, all of them pointing to higher prices.

At the least, conventional wisdom states that a break of a wedge pattern usually comes back to its origin point. So at the least we can expect a test of recovery highs.

If, and I do emphasize "if" this is a C wave in Elliot speak then the a standard C=A gives a target of 94.7

If this turns out to be a correction that retraces the entire bear move to date, then even higher values will be reached.

HUI Daily



(Note: Although not annotated notice that the ADX trend strength indicator is starting to turn up. Tha last time that happened was early April)

Again the action within stocks was poor. Particularly disturbing was the penchant for relative strength during the early parts of sessions, only to see selling crop up in the last hour. A sign of distribution.

One of the worst examples was a well known and highly regarded junior that lost 13% in a flash, on negligible volume.

Liquidity. Everything I see seems to point to the reality that it is drying up.



200dma is confirmed as resistance. The ascending triangle is negated. Worse, the decline was confirmed by daily rising volume.

HUI Weekly



The 65wma which has been long-standing support, is now confirmed as resistance.

HUI Gold Ratio



Down-trend continues. Risk remains high until this trend-line resistance has been broken.

HUI XAU Ratio



Important support line broken. The outperformance of unhedged stock in relation to hedged was one of the key characteristics of the bull market. Underperformance implies the reverse.

HUI Trend Line Study



Yield-Spread Update



Yield spread remained underneath a previouly established support level for the whole week. With the Fed giving all indications that it will continue its Chinese water torture of "measured" rate hikes, the potential for more downwards motion remains high.

Summary/Discussion.

In the ultra short term one could possibly see some back-testing of trend-lines, but nothing worth chasing in my estimation.

There is considerable down-side risk here. As bad as things were last week, the sector is far from being that massively oversold as to entertain thoughts of bottom-picking timing strategies.

If it is in the big picture that gold is going to turn it around, and end the year at $500-$600 - then there will be signs that this is happening in plenty of time to participate. I disagree with that frame of thought that says if you don't buy NOW you will miss the move up.

One can safely assume that if we have a major bull leg up that it will last more than a few days, and that there are always opportunities to pick up stocks before they make major moves.

Analysis such as this is just something that allows you to have a different perpective of the market. One should never trade on the basis of any one analysis. One should never trade on someone else's terms...only your own. What price you buy at is not as important as what happens after you buy.

In a gold bull cycle 200dma's act as support and not as resistance. Stocks outperforms bullion and unhedged stocks outperforms hedged stocks. In bull cycles resistances levels are overcome and supports hold. None of this is happening right now so caution is not an unreasonable suggestion.

Keep a close eye on ratios as they are usually leading indicators of a turn.

Given all the stuff that is happening out there, the environment can turn in gold's favour on a dime, but until it does, I think it is a good idea to keep some powder dry.



Good Trading.


Disclaimer:


The above is written for educational/entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice. The commentary simply reflects the opinion of the authour on the current status of the market. It is prone to error and to change with no notice which itself is again prone to error.

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