Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Sep 5, 2004 at 04:33PM

Introduction.

The last week saw lots of "jostling for position" but with no one yet getting clear advantage. Given a strong day on Friday, the USD will start with momentum...but sustained moves in the currency markets, have been hard to come by.

Bullion Charts

Price Action



Daily



Still in the vicinity of moving average support, but indicators have taken a decidely bearish tone.

Weekly



I put a lot of weight on weekly stochastics and these don't have that much room left to get into overbought, a condition, which on the weekly has always brought on tradable retracements. The negative divergence on the 433 is a bearish technical development.

Stocks - HUI

Daily



HUI held on to the 200 level with ease, indicating that shares are being held tightly and won't sell with out a good reason.

Short-term Bullish Scenario



Again the big time disclaimers on my elliot wave counts. None of the preceding waves have been counted...I simply start with the assumption that Aug 27 marked the start of an impulsive leg up.

Whether this leg is the start of a major leg up or the finishing leg of a C wave within the confines of a countertrend rally is also unknown at this time.

Obviously the key ingredient of this coming to pass is another aborted attempt of the USD to get a clean break above the 90 resistance level. Indeed one might consider the 90 level of the dollar as being the swing line vice the 200. I think a move above 90 and then back below would be a reasonable signal to buy gold stocks even if HUI was still below 200.

Inflation/Deflation Watch

Long Term Yield Spread



On the long term chart the drop from prior highs definitely has an impulsive feel and look to it. It implies that even after a correction upwards that one should expect at least one more downwards leg. Conventional wisdom is that this will act as a drag on gold equities.

Bonds vs Gold



The triangle has yet to resolve itself in one direction or the other.

It is important to remember that this measures "relative" performance. The past few years had both going up,,,only gold outperformed. It is possible for both to be going down...but if gold (which tends to be more volatile than long bonds, falls faster...bonds will "outperform".

Again an environment in which bonds are outperforming gold is one in which the market, whether rightly or wrongly, is more worried about deflation than inflation - or at the least, that inflationary forces are under control.



False break-out? Throw-over? As long as moving average support holds it is too soon to tell. These kinds of techncial divergences rarely signal good things for the bulls though.

Paper = Death?



I am sure many have noticed that the charts of "speccy" gold exploers bear no resemblance to the chart of say a Newmont. I do think that the fate of all things paper are inexorably linked.

The above chart shows that the "hot" risk averse money needed to push explorers and junior miners past trend-line reistances has yet to arrive in force to equities in general.

The chart lies at important support...perhaps an important inflection point?....Continued weaknes is a sign of weakening liquidity, which I feel will also have a negative impact on gold stocks



Yes.. sure ..OK...lately I've opened up the purse strings and have done some short term trading...but outside of a natural gas stock or two..buy and hold I think is a very risky affair.

From the contrarian point of view the above chart says be very careful and to keep a good chunk of your powder in a dry place.

Charts of Interest

Money Supply Growth over 12 months

Five year Zero Maturity

Temporary Market Operations - Outstanding Balance

I am no expert in macro monetary theory so my interpretations of the above are of dubious value. I do think that together they paint a picture that would produce knowing grins and clenched fists amongst the deflationist crowd.

My intepretation of the above is that the FED is valiantly trying to prop equity indexes up - even as the foundations underneath are crumbling. (but then I have been leaning on the deflation side of things myself)

The other feature is that US corporations have truly been fiscal conservatives...issuing little debt and hoarding cash.

US Dollar

Daily



Good bounce off the 50/200 dma moving averages, and condition of momentum indicators leaves it, temporarily, in better technical shape than gold. Again the 90 resistance level remains. It must take it out decisively. Simply reaching it, and wobbling around weakly is not enough.

Since gold has remained in a relative downtrend to USD the USD may actually provide an earlier signal than the HUI price action itself.

Instead of using 200 swing point one might consider using 90....e.g. If USD gets above 90+..then rolls over and goes under...then it is a reasonable bet that it would go down to at least test channel support at 87 and ergo bullish for all things gold.

The potential for getting whip-sawed to death is very high.

Looking for an underlying structure

One of the reasons it is difficult to really talk confidently about what the USD will do is that it is not clear what overall chart structure is actually the dominant one. Consider the ones below.



A lot of bears point to a potential head and shoulders pattern, but I do not think it applies here. One there is a question of symmetry which is lacking, and of course there is no volume data to confirm such a possibility (a text-book H&S makes the head on lower volume than the LHS, with even more volume shrinkage on the RHS)

A better interpretation I feel is to look at the USD as being within a consoldation channel. Breaking the channel in either direction will give measured move targets of 92.5 or 84 depending on which line is broken



Here the chart above is drawn to depict a short-term ascending triangle which would produce new recovery highs if broken to the upside.



When you hear of major countertrend rallies (and I am still of the mind that is what is going to happen)with targets in the mid/high 90's to 100's, this is the structure that is being referred to - a major leading diagonal with a measured move target of 98.

Another view is given below.



Of course, the dominant structure over the past few years has been a parralell bear channel which has fully defined USD price action. It is this structure that is now under assault.





I am sure that if you have read as many bearish dollar articles as I have that you noted that most display the same chart, except that their trend lines still capture USD price action while the above don't.

For me to duplicate that would require me to shove the top starting point a little to the left and touch down...that would change the angle enough to contain the USD price.

Again just another example of how single slanted trend-lines are more "nebulous" than vertical ones.

90 is the key figure. Break that and no amount of massaging can change the fact that a long term trend-line has been broken - giving a whole new dynamic to the technical picture.

Fail to break that, and again no amount of tweaking can hide the fact the USD remains locked in a bear market.

Miscellaneous

I remain bearish on silver. In my opinion, the chart is an accident waiting to happen.

Discussion

Well currently I remain bearish on gold. That sentiment rests almost entirely on the fact that I think that the USD will break 90 convincingly. Of course what I think will happen, and what the market decides to do, are two different things - so doing some contingency planning would be prudent.

You want stocks that are in technical condition to take advantage of any bullish reversal of gold - preferably those who are retracing towards a fib or pivot support, and with stochastics bottoming out. If you have market depth then use it to make sure you have some good bid support underneath you...personally if I buy, I buy what i can at the ask..don't quibble over pennies..get your stock. If you see all that stock underneath you starts getting eaten away...then you will have to decide whether to take a small loss. As much as possible try not to take a losing position into the close.

I would stay away from speccy explorers for now...they tend to lag...keep a few choices in reserve in the case you couldn't find a set-up that suited you...if the up move does have legs, then these will eventually start to move, as most have been basing/consolidating for a while.

In the end only buy stocks under YOUR terms of reference. Don't worry about missing the exact bottom...if you look at stocks during the past major upleg most charts have a nice pattern of backing and filling...giving nice technical entry points to ensure you capital start growing shortly after entry.


On the other side of the coin...if the bearish scenario does come to pass...well we will leave that for when and if that happens.

Good trading,

Bullet Bullet Bullet