Wednesday, June 20, 2007

The XAU and Why I Watch It

The chart below is of the XAU. The XAU is an index of gold stocks and trades in Philadelphia. Many gold analysts and traders look at the XAU, and make their trading decisions off of it, which is why it is important for us to look at it as well. Chances are that if you hold any gold stock, it will follow this index to at least some degree. No matter how strong the fundamentals are of any mining company, if this index goes down hard, your gold stock will too. In addition, I always prefer to look at indexes or ETFs rather than individual stocks, since there is a lot less noise, and erratic volatilty.

In the chart below, I have made quite a few annotations, so feel free to click on the chart to see more of my thoughts on previous XAU price action. In addition to the usual indicators like RSI and MACD, I have a ratio chart below the price. This ratio is the price of the Gold ETF, GLD, divided by the XAU. Surrounding this ratio are bollinger bands. Buy and sell signals are sometimes generated when the ratio lines leaves the bollinger bands. This sort of thing happened in the middle of October, 2006.

Things are looking fairly bullish for this chart. Notice that there is a W formation brewing, and it would be quite bullish if it follows through. Notice as well that currently, the XAU is above its 50 day moving average, which is another bullish development. The bears tried to push the price below this level yesterday, but the bulls were able to close it above. In the event of a small pullback, the 50 dma should now act as support. Please look carefully at the comments on the chart. Although they are of past price action, I think that they have a lot educational value.

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