Tuesday, January 26, 2010

Short-Term Gold and Gold Stock Chartology

I posted earlier today how I thought Gold stocks were a very strong buy here for a trade if nothing else. An 8 week correction has occurred and been sharp. This is more than enough to launch a powerful countertrend rally/bounce or a new leg higher. I favor the latter, but we'll see.

Following are the technical charting points that make me bullish in the short term for Gold stock indices like GDX, $HUI and $XAU.

First is time and RSI. Most even major Gold stock corrections don't last more than 8 weeks without a major countertrend bounce. I will use some of the nastiest corrections in the Gold stock sector to show how this has been true. RSI is generally less than 40 on a daily chart when a correction stops and ideally near 30. Starting off with recent history and working backwards, here's some $HUI action from 2007-8 on a daily chart:

Here's some $HUI action on a daily candlestick chart from the 2005-2007 time frame:

And here's some action from way back in the 2001-3 time frame:

And here's the current $HUI 6 month daily chart thru today's close:

Another bullish factor supporting at least a significant short-term bounce is the Gold to Gold stock ratio. Using the GDX ETF as a proxy, we are due for a bounce in this ratio back the other way from Gold outperformance to Gold stock outperformance. Following is a 3.5 year daily chart of the GDX divided by the Gold price (GDX:$GOLD ratio chart):

The biggest risk to Gold stocks is a stock market crash. Gold stocks can rise during a bear market and have in every secular Gold stock bull market, but all stocks go down during a crash. I think it's quite possible we could have another stock market crash, but I don't think it is time just yet and we may very well have a slower bleed back to the March 2009 panic lows instead of a crash.

Seasonal factors are also lining up well for Gold stocks and a top in the March thru May time frame would be the most likely scenario if history is a reliable guide. I have already put my money where my electronic pen is, so I am VERY BIASED, but I remain bullish on all things Gold. This is analysis is basic and rather simplistic, but Gold is in a long-term bull market, so weakness is for buying. Besides, as Gold bull GG has pointed out, the Prechter Gold "buy" signal has been triggered...


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