Saturday, November 3, 2007

Resource Stocks are at Resistance

For this past week, gold bullion increased in price by $21.00, or 2.67%. However, and this is amazing, gold denominated in Canadian Dollars actually fell. This week, the Canadian Dollar rose relative to the US Dollar by 3.03%, so that means the Canadian gold holders lost .36%.

In this post, there will be quite a few charts. Since in the previous post, we had a look at oil, let's see how oil stocks are doing, to start things off. The daily chart below is of an ETF that contains a basket of Canadian energy stocks. (The ticker symbol is XEG.to. There is another ETF that will allow you to short this index by a factor of 2. Its ticker symbol is HED.to.)


The yellow area is simply showing that this ETF is coming against some gap resistance. The next chart shows the TSX Composite Index. This index is highly oil driven, so it is not surprising to see this index bumping into some overhead resistance as well.



In the TSX chart above, I've also outlined some volume patterns. The next chart is a daily candle chart of XGD, the Canadian gold stocks ETF. There are a couple of things to note here. Firstly there is gap resistance as well in this chart, and there is another layer of resistance that stems from the previous high formed in April.


Furthermore, in the above XGD chart above, you can see that there is a large divergence forming on the Relative Strength technical indicator. Finally, I made a comment on the chart saying that this ETF has not been as strong as, say, GDX. This is because the Canadian Dollar is rising so rapidly.

The chart below shows the daily price action of gold stocks, as measured by the XAU, divided by the gold, as measured by GLD. In a healthy uptrend, we want to see gold stocks outperforming the actual metal. For the last month or so, this has not been happening.


In addition, there is a RSI price divergence apparent on this chart. And if you use your imagination, there is a head and shoulders pattern forming over the last 6 weeks.

So, overall, I feel that at this time there is a confluence of negative factors working against gold stocks. Gold has basically risen 12 weeks in a row, and no market, no matter how strong the fundamentals, can go up in a straight line.

Long term holders of precious metals can definitely ride this out, however. I feel that gold will be at over $1000.00 an ounce this time next year, and the USD Index could eventually go into the 40's, but it will never get there in one straight line.

5 comments:

Dereck said...

Great work Danny. One question: in your sixth paragraph, you said, "In a healthy uptrend, we want to see gold stocks outperforming the actual metal."

I think I have some general ideas about why this should be so, but I was wondering if you could elaborate.

In other words, can I take the converse as the rationale? If the actual metal is outperforming the stocks, then that would be an indication that the stocks are moving far too fast. Is that right?

Or another way, the stocks, being stocks, ought to maintain a higher volatility. Is that right?

Hope you had a good weekend. Are you planning on vacationing down south? I bet you can get a serious discount right now :)

HeadlineCharts said...

Hi, great post. Another negative for gold stocks is that the bullish percent is above 70%, well into overbought. I wouldn't be shorting the group though, just looking for a pullback to add to positions.

Danny Merkel said...

Hi Dereck,

Sorry for the delay in responding to your comment. Once the weekend comes to an end, this blog becomes somewhat neglected.

It has been my experience that gold stocks lead the metal in price action. Near tops, gold stocks begin to peter out before the metal does.

I think your comments are correct. Gold stocks definitely are more volatile than gold bullion.


The Canadian Dollar reached 1.10 US this week. I know some friends at work who drove across the border to buy stuff. I have no plans on doing this however.

Anyway, thanks again for commenting.

Danny Merkel said...

Thanks for posting the BP for precious metals stocks. I just wish there was some way of charting that on StockCharts.com.

STOCK SNIFFER said...

Fantastic work Danny. As you know I follow the gold/xau ratio for possible buy sell entry points. Currently the Gold/XAU Ratio is 4.46 http://www.resourceinvestor.com/pebble.asp?relid=16024 See this link for a good explanation.
Best regards,