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Bullion Charts and Commentary
posted Feb 6, 2005 at 02:21AM

Daily Chart

Another bear channel break-down. The stochastic bounces have been weak, never a good sign. Short-term trend line has been broken. The 200 dma is traditionally strong support. A test looks inevitable. Given that the HUI has broken 200 dma support does not bode well.

From an EWA perspective things do not look good to me at all. The move down from recent highs looks impulsive. At best we are in a fifth wave down. The lack of alternation between the two bear channels gives rise to the scenario that we may be seeing a series of 1-2's waves...suggesting that some major down action may be coming.

Weekly Chart

Bullion remains on it IT sell signal. The stochastics however are reaching a condition which has reliably led to tradable rallies in the past.

Monthly chart

Not the most bullish chart right now. Gold is not a contrarian buy. For gold to remain in a bull market now requires the herd to find religion in gold and propel it out of its multi-decade channel. There is no lack of reasons for this to happen but the proof is in the pudding.

Trading Thoughts

Obviously given that the sector has been in a down trend for over two plus months the charts have taken on a bearish tone. The big question is are they bearish enough to start looking the sector in a contrarian fashion and start buying in anticipation of bullish action?

Has the price action of the past few months been just a correction like the others? Is is just a prelude prior to a new major upleg for the sector?

Most major trend-lines remain in place. The weekly stochastics, which has reliably signalled trading bottoms in the past is now reaching oversold territory especially in stocks. Indeed stocks have gone through a stochastics cycle while keeping a good chunk of their gains. So all that is bullish.

The major bearish fact is that this techncial condition has been reached without the usual correlating technical action from the US Dollar.

Gold bulls expect that soon gold will start rising in all currencies...a true bull market. Maybe so, but that is not happening now. The HUI is below its 200 dma. Bullion looks to be testing its 200 dma. However the USD is nowhere close to challenging its own 200 dma. In other words gold is underperforming the dollar, dropping faster than the dollar is rising.

What if the USD does simply go up to challenge its 200 dma, (not an unusual event even within the confines of a standard counter-trend rally,) how much more will bullion and stocks be pressured?

Bears would argue than another difference this time around is that interest rate differentials between countries is finally start to fall in the USD's favour.

So right now my own thoughts is that waiting for bullish price action is more prudent that trying to catch a bottom on the basis of oversold stochastics.

Again one of the key charts I keep an eye on is the HUI/Gold ratio. If gold stocks, as a sector, start to stiffen, even in the face of rising USD and falling gold, then that is a good sign that the worm is turning. In short I am looking for is the reverse of what happened in mid-November when stocks start hesitating at the 240 level despite a rising gold price. At that time there was no reason for gold stocks not to go up, but they didn't. When there would seem to be no reason for gold stocks not to continue downwards, but they don't...then that is a sign to perk up.

In the shorter term, move back above the 200 level, or the 200 dma would also be bullish developments. Until then, most things gold remain on short and IT term sell signals, and the dollar remains on short and IT term buy signals.

Good trading

Bullet Bullet Bullet