Black gold versus yellow gold. Which
one is in a better position, technically? The two major
indices which reflect gold stocks versus oil stocks,
the XAU and the XOI, are hanging in the balance right
now. Which one is likely to break down (short-term)
and which one is likely to break up?
The charts seem to suggest weakness in
XOI and developing strength in XAU. The XAU index has
been trying to bottom above the 80 area and so far has
done a good job of it. There looks to be strong support
around this level and it should be enough to enable
XAU to rally this month. It doesn’t hurt XAU’s
chances of a rally that the U.S. dollar index, which
typically moves inverse to the gold price, has been
very weak of late, breaking below its 30-week moving
Another thing in XAU’s favor is
the fact that it has pivoted off a major historical
support between 75-80 in recent weeks. If the gold bears
had complete control over the market they should have
been able to break the XAU below 75, but they failed.
This is an important sign the bears don’t have
control over XAU right now. The ball is in the bull’s
hands, now it’s up to them to run with it.
The XOI Oil Index is looking toppy and
is facing resistance from its recent highs between 620-630.
This reflects the current weakness in the crude oil
market, as reflected in the recent decline beneath the
$40/barrel psychological level.
A recent headline from the Financial Times
captured the psychological and technical importance
of lower oil prices, namely that it removes a major
obstacle in the way of a broad market rally. Declining
oil prices can only help lift stocks and gold stocks.
Speaking of market psychology, another
major psychological factor that has weighed heavily
on the oil and gold markets this spring, but which has
recently subsided, is China. Fears of a major economic
recession in China (and hence a slowdown in commodities
demand) have slackened recently. As the FT put it in
a recent article, "earlier fears about China’s
slowdown now appear to have been overdone."
It would appear from a technical
assessment of the markets that the XAU has a good chance
to rally in June, while XOI will have its work cut out
for it and faces selling pressure.
Clif Droke is the editor of the Bear Market Report
newsletter, a 3-times weekly forecast and analysis of
stocks, markets, gold stocks, and equity cycles. He
is also the author of numerous books on finance and
investing, including the top-selling "Moving Averages
Simplified." Visit his web site for free samples
of his analysis at www.clifdroke.com