07/16/06 - TraderMike: An Important Week for Gold Stocks
Although the DOW and Nasdaq had gotten smashed by the end of last week,the week was fairly uneventful for gold stocks, which is where I'minvested. So I didn't make any changes to my positions. I didn't buyanything or sell anything. In fact, I didn't really watch the action thatclosely at all, spending most of the time working on the new website.Which, by the way, I expect to be beta testing next month.
But things ARE going to change soon. The action is going to come back togold stocks. The volatility in the stocks shrunk last week and when thathappens a large move follows. You can see this in the bollinger bands onthe chart of the HUI above as they are now pinching together. This meansthat gold stocks can continue to trade in a narrow intraday range for afew more days, but if they manage to do that the volatility will becomeso compressed that a big move will inevitably follow.
Of course, narrow bollingerbands and shrinking volatility may tell you to be on guard for a largemove, but it doesn't tell you which direction that move will take. To tryto answer that I've been looking at the above chart for sometime.
After bottoming in June, the XAU has rallied all of the way up to the 150area. It then encountered some powerful resistance at the 145-152 areawhich marked a 50-61% retracement of the peak in May and low in June. TheXAU had to get to this area in order to confirm its bottom andreestablish its bullish pattern. It did that and did so quickly.
In each of the past few summers, we've seen gold stocks bottom in May andthen rally back up to this retracement level after which they wentsideways before breaking out towards the end of July or in August(remember how important XAU 95 was last summer). Those rallies led topowerful bull runs.
Last week, gold outperformed the stocks causing the XAU/gld and HUI/gldratios to pull back. Usually this is a negative because these two ratiostend to lead the action in both the mining stocks and in gold. However,you can also chart out the ratio itself and it is now oversold.
What this means is that the performance between gold and gold stocks hastemporarily gotten out of whack. (There are times when gold stocks leadthe metal so quickly that they stall out in order for the metal to catchup with them, and vice versa. Either gold is going to pull back while thestocks hold up, or don't fall as much, or else the stocks are going tohave to rally hard while gold doesn't move up.) At the same time, the 60minute stochastics on the XAU became oversold on Friday and gold stocksrallied into the close, causing them to give a buy signal. This meansthat the short-term action should be up.
Combine this with the fact that the bollinger bands are suggesting a bigmove should begin by the end of this week, and we have two likelyscenarios.
1)Gold and gold stocks either move up at the start of the week causingthe XAU to go up toward its recent 150-152 resistance area. Both wouldthen pull back for a day or two, during which the stocks hold up againstthe metal. Or else gold and gold stocks trade in a narrow range duringthe first few days of the week. Either way this action is stillwithin low volatility, thereby causing the bollinger bands to narrow evenmore. Gold stocks break out and rally at a faster pace than the metal.Such a rally would take the gold stocks near their highs within a fewweeks.
2)Gold retraces its recent gains to fall into the 620 area. The XAU fallswith gold, but not at a faster pace. The XAU bottoms in its 139-140support zone (the area of its 150-day moving average and 1/3 retracementof the rally from the June low). During and after this correction goldstocks reassert their strength over the metal.
What will be important is to see if the XAU can hold inside the range ofits narrow bollinger bands. As long as it doesn't close below its lows oflast week it will be lining up to break out to the upside. If they arestill above their lows by the middle of the week and the bollinger bandsare shrinking, I may add on to some of my positions.
I think the most likely scenario is a bullish breakout, despite theweakness in the XAU/gld ratio last week. The reason why is because we'veseen this type of weakness happen for a week or two in every summer onlyto see the bullish pattern reassert itself.
Last year, for example, in July after the XAU rallied up its the 95 area,it went sideways all of the way into August. During this sdeways action,gold rallied while the stocks failed to move higher, causing the XAU/gldratio to move down. Even though this happened, the stocks continued tohold support and eventually broke out.
The XAU/gld ratio can give false signals during times of consolidation ingold stocks. In fact, during times of consolidation in any market, falsesignals from technical indicators abound. That's because the market isn'ttrending up or down and many indicators are only reliable when there is aclear trend. When gold stocks are falling or rallying, the XAU/gld ratiois much more accurate than when they are just going sideways.
Instead, short-term support levels and the bollinger bands become moreimportant. A move above or below the bollinger bands usually continuesand that is what I have my eye on now and why I suggest the recentsupport and resistance levels on the XAU are what you need towatch.
The action this week is going to set the stage for gold stocks for therest of the summer. If the XAU does not close above its last week's lowthis week, then it will be setting itself up for a powerful rally thatwill likely last all of the way into the end of the year.
I've been bullish on energy stocks for some time, but I find it hard tobe excited about the sector as a whole now. The sector hasen't been upwith oil and it is hard to imagine more bullish news for oil coming outover the next six months than there is now. When I zoom out and look at athree year chart of the energy stock sector, it looks like it is justgoing to trade in a range for the next few months. It may go higher andmake a new high, but, even if it does that, it doesn't look like it is ina position to trend up for months (like gold stocks have the potential todo) so it's hard for me to get excited about it.
There are stocks in the sector that are worth holding and look good -especially the high dividend paying energy royalty trusts like BPT andPGH. And there are some other stocks that still look strong such as DPM,but money should be moved out of any lagging energy stocks and put tobetter use elsewhere.
Top10 Blue Chip Stocks With Market Caps Above $500 Million
Yamana Gold(AMEX: AUY, Toronto: YRI) 5/05/06 $11.25
Glamis Gold(NYSE: GLG) 5/22/06 $33.55
Bema Gold(AMEX: BGO) 5/22/06 $4.75
Agnico Eagle(NYSE: AEM) 5/22/06 $32.45
NovaGold(AMEX: NG, Tortonto: NG) 5/30/06 $14.00
Southern Copper(NYSE: PCU) yields 12.90% at entry point 602/06$87.60
Meridian Gold(NYSE: MDG) 6/02/06 $32.25
Eldorado(AMEX: EGO) 6/13/06 $4.21
Tanzanian Royalty Exploration(AMEX: TRE) 6/13/06 $6.40
Top10 Emerging Growth Stocks With Market Caps Below $500 Million
Paramount Gold Mining(OTC: PGDP) 4/24/06 $3.40
Eaglecrest Explorations(Vancouver: EEL) 4/26/06 $0.60
Battle Mountain Gold(OTCBB: BMGX) 4/27/06 $0.58
Blue Pearl Minig(Toronto: BLE) 5/09/06 $3.20
Alhambra Resources(Vancouver: ALH) 5/10/06 $2.78
Gold Reserve(AMEX: GRZ, Toronto: GRZ) 5/30/06 $7.27
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