07/18/06 - TraderMike: A Quick Correction for Gold Stocks
Yesterday I laid out twoscenarios for gold stocks, the second of which read:
"Gold retraces its recent gains to fall into the 620 area. The XAUfalls with gold, but not at a faster pace. The XAU bottoms in its 139-140support zone (the area of its 150-day moving average and a 1/3retracement of the rally from the June low). During and after thiscorrection gold stocks reassert their strength over themetal."
With yesterday's close of the XAU below last week's lows and gold downaround $20 it now looks like this second scenario is going to play out toa T.
I can see gold stocks falling one more day and then reversing to go backup into their recent trading range, where they would consolidate and thenbreakout a few weeks later. The quicker gold stocks drop thequicker they can reverse. The worries about the Mideast are starting todim and tomorrow Fed Chairman Bernanke will give his semiannual testimonyabout the economy to Congress. It would not be surprising to seegold dip into that over worries about what he may say. Of courseodds are he won't be nowhere as hawkish as people expect as there are nowclear signs that the economy is slowing. That would put a big bidon the market.
But let's see where the technical bottom points are for gold and theXAU:
One thing I want you notice is the action on June the 7th. Thecurrent dip is different than the dip back then - that ended up turninginto a route. That drop started with the XAU and gold stocksfalling and breaking support while gold just dropped down a little. The stocks led gold down and it was ugly. This time gold isstarting to lead the stocks down first, which is what a dip is supposedto do during a bullish uptrend. As long as this continues then Ithink gold will bottom and gold stocks will hold their supportlevels. Just as XAU 150 turned into powerful resistance the XAU135-139 area should be powerful support.
Gold has support at 626, and then 610. 610 would be a 50%retracement of the rally, but 626 is a more likely bottoming point. The GLD is trading at a different futures contract month than the abovegold chart. 626 translates into 62.0 on the GLD. It'sbasically a 20 points drop from yesterday's close.
That would likely be a 2-3% further drop in the XAU(136-137.50)
Not coincidently the 135-139 area is now support on the XAU. 135.20is a 50% retracement of the June bottom and July peak while 139 is the1/3 retracement of these important turning points.
The most bullish thing would be for gold to fall off of the open thismorning and for the gold stocks to hold up against the metal during theday and then start to get strong going into the close. I couldconfidently call an end to this dip and I'd actually add on to myposition if this happens. If both go up on the morning then it willbe hard for me to add on and I'll just hold what I have. I want toadd on at some point, but if I don't get a real clear buy signal on thisdip then I'll just wait to we see gold stocks go back into their rangeand then consolidate for a few weeks.
But the trend is still bullish so quick snap backs are possible. However, at this point if we see a rally from the open I think the oddsare we'll see gold move back down after a few days. Gold stocks mayhold up if that happens and give us a buy signal. But until we seeeither gold stocks hold up while gold drops or a few weeks ofconsolidation its hard to throw money at them.
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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