Thoughts on the gold/silver stock correction
month of May proved to be an eventful month for the leading gold and
silver stocks with lots of wide swinging movement, mostly to the
downside. This volatility didn’t go unnoticed by Wall Street either,
with several articles appearing in the leading financial publications
drawing investors’ attention to the "attractive" volatility currently
underway in the metals arena. The question weighing on the minds of
most gold and silver stock traders is whether the sector has bottomed
and if not, how much longer until it does?
an immediate-term basis the gold/silver stock sector is "oversold"
based on several internal indications and could get a mild relief rally
in the coming days. For example, among 50 actively traded and
representative gold shares that I look at each day, most of them are
currently below their 15-day moving averages. For the last few days
there have been at least 40 of these 50 stocks closing each day below
their respective 15-day MAs, which indicates at the very least that the
sector should get at least a baby bounce to correct this internal
imbalance in the immediate-term.
worth mentioning is that the 5-day, 10-day and 20-day price oscillators
for the XAU gold/silver index are coming off an oversold reading
similar to the one following the earlier March bottom. You may recall
at that time the XAU had peaked around 155 in early February and then
began a 6-week correction that took the XAU below its 90-day moving
average and down to the 120 area before bottoming and reversing the
decline in early March.
you can see in the above daily chart of the XAU there is a similarity
between the correction bottom of the February-March decline and the one
just experienced in May. In both corrections you can see the XAU
slightly penetrating below its 90-day moving average (red line) before
finding support and reversing back above it. Even the MACD indicator
shown in the above chart is at a similar "oversold" reading compared to
the correction low of earlier March. The similarities end there,
February-March correction in the gold/silver stock sector was different
from the correction currently underway in that while the XAU fell
temporarily below the 90-day MA at the early March low, the Amex Gold
Bugs (HUI) index and CBOE Gold Index (GOX) did not but instead managed
to stay above the 90-day MA in reflection of the relative strength
among certain mining shares at that time.
difference between the early March low and the current one is that the
leading silver mining shares were able to maintain their advances
by staying above the 30/60/90-day moving averages and even made higher
highs and higher lows at the time when many actively traded gold shares
were making lower highs and lower lows. As discussed in my previous
article entitled "Leading indicators for the gold/silver stock sector,"
the silver shares are sensitive and often act as leading indicators for
the gold stocks. At the most recent peak in earlier May the leading
silver stocks had already topped and were in decline and many still
haven’t confirmed a bottom yet.
relief rally coming off an oversold extreme is not the same as the
start of a new bull market leg. For that to happen the sector will
require some more time to repair the internal damage inflicted
following the previous rally peak in earlier May. One of the main
confirmations of a gold stock bottom will be in the internal momentum
readings of the short-term momentum indicators for the sector. Previous
gold stock corrections ended when the internal momentum among the 50
actively traded gold shares reversed from a lower reading to a higher
reading. At market tops, momentum tends to precede a decline in the XAU
while at bottoms a reversal in momentum from down to up happens
concurrently with price reversals.
of the main indications of a reversal in short-term momentum is
reflected in the chart showing the rate of change (momentum) of the new
highs and new lows among the 50 actively traded gold shares. Known as
GS HILMO (Gold Stock Hi-Lo Momentum), it shows the reversals in
internal momentum on a 5-day, 10-day and 20-day basis and the
interactions between them.
the last correction low back in March, GS HILMO reversed higher after
falling below the "zero" line in February to confirm the bottom. As you
can see in the most recent GS HILMO reading, this hasn’t occurred yet.
Therefore the gold stock correction is presumed to still be underway,
and notwithstanding the possibility of an oversold rally, there could
still be a lower low among the actively traded gold and silver shares
before the next bottom is confirmed.
Clif Droke is the editor of the daily Durban
Deep/XAU Report, a technical forecast and overview of
several leading gold stocks, including DRDGold and the
QQQ available at www.clifdroke.com.
He is also the author of numerous financial books, including
"Gold Stock Almanac 2006".