Saturday, May 24, 2008

The Yen, Vix, and the Gold/Oil Ratio

I thought it would be a good idea to a have a mid-vacation update. Here are five charts that I found interesting this week:


Please click on the charts in order to read the annotations. Thanks for looking, and have a profitable week.

Sunday, May 4, 2008

Monthly, Weekly and Daily Gold Charts

For this past week, the price of gold lost about $32.00 an ounce, and gold stocks, as measured by the XAU lost another 4% for the week. When gold goes through these normal corrections, I usually refer to the monthly charts, so that I do not lose sight of the larger picture. The chart below is monthly chart of the XAU:

The above chart goes back until 1985, and each candle represents one month of price action. The main point of the above chart that I would like to make is that gold stocks are in a massive bull market, and that this correction we are going through has not even made a dent. Secondly, the XAU is close to support at the 160 level, which previously was resistance.

The next chart is a weekly chart of an ETF that follows a basket of large gold stocks. The ticker symbol is GDX:

The main point in the above chart is that GDX is at gap support. This gap support was previously the resistance that contained gold stocks during its prolonged trading range. In fact, the entire year long trading range that gold stocks went through was defined by gaps.

Up next we have a daily chart of GDX:

I showed the above chart in my previous post. In the annotations of that chart, I said that if GDX descended to the green support area and made a hammer, I would cover my hedge. This is what in fact unfolded this week, so, thus, I am no longer hedged.

The evidence is now building for a bullish case for gold, however, it is important to not dive in head first into this market. I will slowly scale back into gold stocks depending on how the evidence looks.

One more more piece of evidence in favour of gold stocks is a chart that divides the price of gold by the HUI gold stocks index:

The above chart helps spot when gold stocks are relatively undervalued to the price of gold bullion. I would say that this development is a positive for gold stocks.

The bottom line is that it probably is a poor time to be short gold stocks right now. I am not 100% convinced that the bottom is in, and stand ready with cash to be redeployed to the long side.

Unfortunately, I have decided to take a break from this blog for at least several months. Good luck trading in the meantime.