Sunday, April 13, 2008

The HUI Index and US Dollar Index

Gold and gold stocks were more or less unchanged for this past week. In the last two posts, I said that I was getting mixed messages from the charts I analyze, which seems to make sense now, as the bulls and bears are at about equal force.

I doubt, however, that gold stocks will continue to grind sideways for much longer. Let's have a look at a daily chart of the HUI:

What I am concerned about is that gold stocks may have another leg down coming. If this were the case, it would make this correction very similar to the last 2 corrections, as the above chart illustrates.

The next chart is a daily chart of GDX, which is basically an ETF that follows the HUI. One characteristic that GDX does a better job at showing though is gaps. The chart below shows that there is an unfilled gap. Most gaps tend to be filled at one time or another:

Furthermore, GDX's price action has been contained in a trading range outlined by the 2 black lines above. A break across either line will let you know who is in control; the bulls or the bears.

Finally, notice how the Bollinger Bands contracted right before the previous correction. This is because Bollinger Bands help measure volatility, and periods of low volatility tend to precede periods of high volatility.

Finally, whether or not we are due for another wave down will depend on how the US Dollar holds up. Here is a weekly chart showing the USDX:

The fact that the USD has not made a lower low in 5 weeks could be taken as evidence that the currency could be in the process of cratering short term. Nonetheless, the US Dollar is in a killer downtrend, so I would not go long this currency.

I still think that Gold could hit $1,200 an ounce, and Silver $30.00 an ounce before the year is out, and I am still dollar cost averaging into physical silver even now, since, we are, after all, in a long term bull market.

1 comment:

Anonymous said...

hi, I agree with your dollar cost average strategy. This market is really difficult to predict lately.