essay is based on the Premium Update posted on June 11st, 2010
previous essay we have emphasized the importance of the analysis of the Euro
Index, while evaluating recent performance of gold. We have also featured a
gold chart that included a resistance level which gold has just approached.
Since that was the case, you might be wondering if the final top is in or
not. Consequently, this essay is going to feature the updated version of the
previous gold chart (charts courtesy by http://stockcharts.com), with an additional
important factor - areas marked on the below chart with blue ellipses.
note how the recent local tops for gold coincide with the stochastic
indicator above the 80 level. In other words, in the previous 18 months there
was no significant top that was not heralded by Stochastic trading visibly
above the 80 level. Today we do not see an extended (more than a few days)
above the 80 level, which indicates an additional rally period is likely
before the top is reached. It seems that the first thing to take place is the
Stochastic indicator moving visibly above 80 and the rally then runs out of
based on this single factor, gold does not appear to have topped at this
point. Let's take a look at the HUI Index for more details.
week’s HUI mining stocks chart is basically unchanged since the last
week. Although it had appeared to be the case until about two weeks ago,
there are virtually no similarities with recent trends and that which was
seen in the November 2009 when a strong rally took hold and lasted for
several weeks. The lack of strength in the mining stocks could mean that the
rally in gold does not have much further to go from here.
one more thing that we would like to comment on this week before moving on to
the short-term chart analysis. One of the messages that we've received
recently included a question about the possibility of existence of the
cup-and-handle formation with the cup being formed between Dec 2009 and May
2010. The implications of this would be bullish, because it would mean that
we are right now in the "handle" stage, which - when completed -
marks a beginning of a strong rally. This situation is even more visible on
the short-term GDX ETF chart below.
we don't consider this to be the cup-and-handle pattern because of two
important reasons. First of them is the shape of what would be perceived as
"cup". It should be almost ideally U-shaped, and as we see the
bottom was quite sharp. The second - and the key one here - is the non-confirmation
form the volume. The corresponding volume should also be U-shaped, which
means that the bottom of the cup should have been formed on the lowest volume
in the Dec 2009 - May 2010 time-frame. The reality is that the bottom took
place on huge volume, which is exactly the opposite of what one would expect
from the "cup" pattern.
the HUI Index chart does not provide us with clear medium-term bullish
signals at this point.
closer inspection of the above chart shows a slightly higher volume daily
decline followed by a lower volume rise on a recent trading day. This is
normally a bearish sign but may also simply be attributed to consolidation.
a slight increase may be seen for the precious metal sector soon, this will
likely be offset by any downward movement in the general stock market. This negative
influence could more than negate any minor rally for precious metals.
However, when the general stock market bottoms out, the negative correlation
of the PM sectors could possibly result in a huge catch up rally for
silver and mining stocks. This may mean a smaller decline instead of a bigger
rally, but it's too early to say at this point.
this writing, gold and silver stocks continue to be slightly positively
correlated with the general stock market. The situation on the latter is
slightly bearish, and at the same time we have bullish signals from gold.
confirmation comes from the analysis of the GDX:SPY ratio.
helps us to analyze the precious metals stocks' performance relative to the
general stock market. The ratio in the above chart actually provides us with top
calls, which is another word for sell signals for the whole
precious metals market.
the volume would reach exceptionally high levels (resistance level) and some
kind of resistance would be encountered, thus forming the top also in this
particular ratio. Recently, however, neither is yet the case. We have
not seen high volume levels and we are presently close to the month-to-month
0.5 support level. This means that when this level is reached one share of
the SPY ETF is equal to two shares GDX. When gold and silver stocks are this
high - relative to other stocks, it used to be advisable to get out of the
market as the top was very close.
we have not seen the ratio reach the 0.5 level yet, and it did not provide us
with a sell signal in the form of very high volume. Therefore, the analysis
of the GDX:SPY ratio suggests that the final top has not yet been reached for
the precious metals sector
to numerous unclear signals and lack of clarity with respect to the general
stock market (slightly bearish sentiment), we conclude that the risk/reward
ratio for mining stocks is not favorable enough to enter speculative trades
at this point.
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Thank you for reading. Have a
great and profitable week!