Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Aug 21, 2004 at 03:45PM

It has been awhile since I have presented a formal look at the gold sector. There has been no real need...but that has changed.

First to summarize what was said in my last update on July 31,

"My current view of the gold sector remains unchanged. It has completed a first leg of a secular bull. It is now in the process of correcting that entire move and that lower prices lay ahead. This move will correspond to similar counter trend action in the USD....

In the short term, the back-testing I was expecting was a little slow in developing - but looks to continue and may offer opportunities for nimble traders with proven risk management criteria...

This would correspond with some consolidation in the USD and a short term counter trend rally in equities in general.

100% cash remains my default position"


Of course the catch all word here is "nimble". In short term trading, being nimble means nailing a good entry point, picking the right stock, and then exiting with profits secured.

All three criteria must be met in order to make a good trade.

Well time to get back to work. The big question of course is whether gold's recent strength is a sign of more to come, or wether this is just a counter trend rally completing it's work in keeping the bulls interested? On to some charts.

BULLION CHARTS

Price Action



Bullish price action. 420 seems a likely target considering price action alone

Daily Chart



The big fly in the ointment is the overbought status of a lot of key indicators I use for short term trading. They are at levels associated with at least short term pull-backs.

Weekly Chart



Same problem here. Dual stochastics are getting into overbought. Even when the gold bull was not debatable this was a condition that led, at the least, to very tradable pull-backs.

Long-Term Monthly



I read so much bullish analysis, by instinct I tend to focus on the bearish spin of things. That of course can be dangerous...especially for those who short stocks. (which I don't)so I can afford to be "difficult".

The above does show three potential scenarios. I know I sound like a bear but in my estimation the most bullish thing that can happen for the longer term health of the gold bull, is a countertrend correction to back test the triangle support line, and then move from there to take on the upper channel resistance. A move up to upper channel resistance now, which corresponds to a triple bottom on the dollar could mean years of pain to follow...not months.

As for the Prechtorian fantasy? No...and let us leave it at that for now.

STOCKS

HUI Daily



There are only a hand full of humans on the planet (Petch, O'Brian, Bezrodny) that can consistently use Elliot Wave Analysis to good effect - I AM NOT ONE OF THEM!

Like I was telling one reader, "Elliot-Speak" is like an advertising jingle I can't get out of my head...

Still - to my untrained eye - it appears that the entire chart action whether starting from Dec or Jan can be counted in threes. To me it reinforce the hypothesis that this is a countertrend rally within a larget correction.

From a more traditional view we see the stochastics and RSI are in a technical condition that usually corresponds to at least a short term pull-backs.

HUI Weekly



Some negative divergence on the 433 stochastic..but on the whole there is room for a sustained move

HUI Fib Study



Overbought on the daily just as it hits significant moving average and fib resistance.

ENVIRONS

Ratio Charts



Bullion hits new highs but HUI/Gold ratio fails to confirm.



Yield Spread



Every analysis, gold or otherwise, that I read or see on TV continues to doubt that Greenspan should be taken on his word, that he will continue to raise rates in a "measured" manner. In every case, gold or otherwise they advocate the holding of "paper" equities. Every piece of econonic data that is coming out is shoe-horned into the mantra that Greenspan is between the "rock and the hard place", "in a box", "hands are tied" etc.

I disagree completely.

Look there are boxes, and then there are boxes with locks on them. Greenspan has spent a lot of time studying the "Japanese Experience". The last place he wants to find himself is staring at the deflationary aroma of a recession/contraction, with no bullets in his gun.

Even if oil collapsed, he wouldn't stop - indeed the increase in liquidity of lower oil prices would be used by him as an opportunity to really load up.

In short I think the market is in denial that the tail winds of the reflation trade is being inexorably taken away from them. Stocks are going to have to go up the old-fashioned way...by making money. Odd-lotter speculators can only do so much.

Asian Markets

China






An interesting chart considering that growth numbers coming out of China have barely budged. Unless it reclaims the neck-line level of 30 as support, the chart continues to paint a bearish picture.

Japan

Monthly Long-term Chart



The Nikkei is at the half-way point of a long term channel, a location where IT decisions are usually made. Things can go either way but with the index now trading below its 200 dma (see daily chart below) odds are slightly better than even, that a major down leg will soon be signalled on the monthly chart.

A move down to the lower channel would present an excellent "buy and hold" entry point.

Daily Chart



THE GREENBACK

US Dollar Daily



The "news" in terms of budget deficits and trade imbalances couldn't have been worse for the dollar and yet it remained resilient. Somebody was buying into that bad news and it sure wasn't Joe Six-Pack.

From an EW perpective one can still argue that it is finishing off a wave 2 correction and is about to start a wave 3 up. It shouldn't be hard to tell as wave 3's are supposed to be strong, and you would expect the USD to start putting in some strong candles.

If 87 gets broken then that EW count goes kaput.

US Dollar Weekly



US Dollar Monthly

As many readers undoubtedly know, Steve Saville came out with an article recently where he stated that the USD could rally up to the 100 level - which works out to be roughly a 50% retrace of the down move.

My own thoughts at this time do remain with a Fib retrace but of the 38% variety. True equities accomplished a 50% retrace off October Lows. They came off very oversold conditions, had the reflation trade wind behind them and then had timely economic and profit numbers to sustain the move.

The USD is coming off similiarly oversold conditions and will be aided by the unwinding of the carry trade...but it is hard to imagine the dollar having the support of "fundamamentals". I guess a much lower oil price would help the import side of a lot of equations..but I have no detailed knowledge in that regard

But in the end, all of this is pure conjecture untill the 90 level is broken with authourity.



Summary/Discussion

Everyone has thier own "system", and sets of indicators and time frames that they use for short-term and IT trading. In the end, if it makes you money, that is all that counts.

For me, given the daily and weekly stochastics on bullion are at and near overbought respectively I do not see this as a good jumping on point. The RSI reaching overbought on the HUI also a signal that one is depending totally on momentum.

The resiliency of the dollar under extremely negative newsflow, hints that it is ready to rally given half a chance. 87 really "is" the technical line in the sand. Break that to the downside and then I would find myself reevaluating everything.

Another indirect factor is the COT on Silver, where large specs are net long at a mind-numbingly extreme ratio of 16 to 1. Everyone is on the same side of the boat.

Silver COT Chart

The McClellan Oscillator is much closer to the top of its range than the bottom.

Obviously then any trade entered now on the long side is strictly momentum trading. There is nimble and then there is really nimble. Even if you disagree with the gist of the above analysis I think it better to wait for a bounce off a clear support line (a Fib support, horizontal price line) to increase odds.

All in all though, there is still an argument that all the chart action since the May bottom falls within the scope of a countertrend rally - and has done everything you would expect a counter trend rally to do. All the oversold indicators have now been completely unwound - indeed many are now at overbought.

Sentiment which was abysmal, is now bouyant. The consensus of every gold analysis I have read, are calling for clear skies ahead. Let me see...yup..even Kerns is getting wobbly on his triple sell.

Can gold get from here to $430? Of course...with all the "stuff" going around in the world anything is possible, and $50 oil getting everyone on edge. But from a technical point of view, getting to 430..or even the upper channel of the monthly chart - will the leave the gold sector in a completely saturated position.

Coincident with a complex bottom in the USD..it will probably mean having to get a short account, because I doubt if anyone is going to make money going long on anything "paper" for a few years after that.

Bullet Bullet Bullet