Tuesday, August 21, 2007

A Weekly Look at Gold Stocks

After large corrections like the one we just had, I always look at the longer-term charts to get a better perspective and to assess the damage. Even though the selling in Gold Stocks became severe at times, I think there was no long-term technical damage to the weekly charts.

Here is a weekly chart of the XAU:

Many gold analysts, including myself, have been saying that gold stocks were winding up for a powerful breakout that would take prices much higher. In the above chart, you can see the blue triangle that once contained this coiling price action. Obviously, this pattern is no longer valid, but I have drawn red lines to outline a new pattern, which appears more like a trading range. Basically, the bullish triangle has morphed into a more neutral sideways range.

One positive aspect about the above chart, is that the XAU is at a quadruple bottom. Also, notice the long lower shadows on the weekly candles as the price approaches the lower red line. This indicates that bulls have come in and scooped up gold stocks at discounted prices when prices descend to this level.

In a previous post, I said that GDX was at a quadruple bottom, and this observation did nothing to halt the fall in prices, so you may be dubious about this quadruple bottom. That would be a fair reaction, but remember that these charts shown are weekly charts, and the GDX chart was a daily chart. I have always found longer term charts to be much more reliable.

Finally, let's have a look at one more chart:

The above chart is of the ETF that mimics the S&P/TSX Global Gold Index, ticker symbol XGD. It is in more or less the same shape as the XAU chart. One thing you probably noticed is the quadruple bottom as well.

This happens to be the only way I play gold stocks, and I think it's good a vehicle for doing so. The only thing is that you have to keep an eye on the Canadian Dollar if trading this, since it really affects its performance.

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