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[TTHQ Staff]

 

04/17/06 - TraderMike: Time to Buy into a Parabolic Rally?(WrittenAfter Market Close)

I have received so many emails today about gold stocks that I simplycan't answer them all.  Most of them are full of worry about thegold market.  Some want to know what I think about this gold stockor that one and ask if should they buy or sell one stock that seems to belagging to buy one going up a lot.  Don't read to much into what onestocks does when compared to another one on any given today.  TodayNewmont was one of the top performing gold stocks and it has been laggingfor weeks.  What matters when you buy is which gold stocks hold upwhen the gold market drops, not which ones go up the most. Afew emails are from people worried they are missing out because goldstocks are up today and the metal is up over 15 while I've advocatedsitting on the sidelines.

I still do.  Last week I took a small short position and thencovered on Thursday.  I went into this morning, as I explained in apre-market pro bulletin, planning to re-enter some short positions ifsome indicators gave a sell signal, but this didn't happen.

You shouldn't try to chase this move in gold.  I'm not buying and amstill thinking the next intermediate-term move is going to be down andwill likely start in days.  Gold stocks are in a dangerous positionright here and could start a new intermediate-downtrend - not just ashort-term one - before the week was over. I was just alittle early last week in trying to take a position against it.

Gold stocks are still lagging the metal.  With gold at 615 the XAUshould be around 200.  The relative strength XAU/gold ratio has yetto break out to a new high, a warning that we are near the end and notthe beginning of a rally. 

Gold has gone straight up like it did last December and during the topsof 2004, 2003, and 2002.  At the very least we're going to see themetal start a pullback soon like it did in December and at the worstwe're going to see it start a full-blown intermediate termcorrection.  Either way don't buy now, wait for a dip.

You make money in the stock market by being patient and waiting for lowrisk/high reward entry points.  If you can't do that then you shouldtake your money out of the market and go to a casino.  If you wantto take a low risk/high reward trade in gold stocks this week it willprobably have to be on the short-side at this point.  Once we get agood correction for a couple of weeks - and it will happen at one pointor another - then you'll be able to buy.

Silver stocks are a good example of how dangerous the precious metalssector is now.

Silver has gone crazy over the past six weeks and today closed again at anew 52-week high.  Yet almost all silver stocks remain well belowtheir 52-week highs and are technically deteriorating.  Look at SLW,PAAS, or HL as examples.  These stocks are more vulnerable than goldstocks to a hard correction.  Silver has gone up over 30% in thepast two weeks and the silver stocks haven't gone up.  What is goingto happen once silver starts to correct to the stocks?

If all you looked at today was HL and PAAS you would never never knowsilver went up hard today.  If you looked at Newmont and Barrick ina vacuum too you would never know gold went above 600.

Last week we got a sell signal in gold stocks on Tuesday.  Gold thenfell to 590 support and bounced going into the end of the week. Today gold gapped up above 600 and rallied to the 615 area.  It willlikely continue this move into tomorrow morning and possibly for anotherday or two.  Resistance on gold is in the 625-630 area.  If wereach that soon we'll probably see a key reversal off of this level tomark the beginning of a large correction.  If gold stocks falterwith gold at this level then they will be giving us a dangerous sign thatan important top is being made.

An alternative, and less likely, scenario is for gold and gold stocks todigest the move they have made now by pausing or even making a smalldip.  That would be a healthy correction within an uptrend and wouldrefuel the rally so that it can go further. It would be more of the sameof what we've seen since mid-March. So I'm prepared to shortif gold shoots up another 15-30 points this week and I am also preparedto make a play on the long side if we get some consolidation. 

If I end up doing that I'll be looking to buy small juniors that arestill consolidating that I have been tracking instead of the regularnames, which I don't think are in good buy points.  I'll explainmore if we get to that point.  For now I want to see if gold goes upanother 15-30 points in the next few days.

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