Saturday, August 16, 2008

Gold Stocks Damage Assessment

In this post, I will attempt to analyze the severity of this week's sell off, and contrast it with the sell off we had this time last year.

Much of the weakness we have seen in the gold market comes from a rapidly appreciating US. Dollar:


As the above chart illustrates, the US Dollar has exploded past its 50 day and 200 day moving averages, which is short-term bullish. However, the 200 day moving average is still trending down, which means to me that the long-term trend is down.

I never thought I would say this, but the US Dollar at this point is extremely overbought, after devastating all major worldwide currencies this month. For example, the US Dollar has appreciated against the British Pound for 11 consecutive days in a row. Nonetheless, I still feel that this is a counter-trend rally at this point, as the next chart will hopefully show.

The next chart is a weekly chart of the Euro:


The above chart shows that the Euro is still contained within its long term uptrend, and is now testing its bullish support line. I feel that at this point there has been no long-term damage to this chart, and I will maintain this view for as long as this long-term trend line holds.

It is worth noting that we suffered through a sharp correction in the Euro this time last year. If you want to get some background on this, please read what I wrote this time last year.

Finally, here is a weekly chart of GDX:


Gold stocks continued their short term trend downwards this week, and have descended to an area of strong support. As the above chart shows, this will be the fifth time that GDX has tested this support area. It is essential that GDX holds this area on a weekly closing basis for the long-term trend to remain positive. If you are curious to know how this chart played out this time last year, then please read this post.

For my own personal trading account, I continue to hold my short position, since the short-term trend remains down. I am sensing that my position will not last for much longer, but I will let the price make the decision for me. At the same time, for my long term investment plan, I do plan on doing some serious dollar cost averaging of physical silver at my favourite coin shop this weekend.

4 comments:

RedGoldCU said...

Keep up the good work my friend! It is greatly appreciated. (:

Peter said...

Daniel, great analysis. I'm also looking for the bottom in gold, I think it is very near. I'm also fairly new to trading, but I've seen a few of these harsh corrections. Usually bearish sentiment gets worse than the previous seasonal lows. In this case I wouldn't be surprised to see gold reach 750 and possibly see a short term breach of the euros trendline. Are you trading miners or futures contracts?

I'll be in touch. I'd appreciate your feedback as well. Seems you have a very good style.

http://theactiveyounginvestor.wordpress.com/

Danny Merkel said...

Hi Steve,

Thanks for the comment. Glad you enjoy it.

Danny Merkel said...

Peter,

I have been trading Horizon ETFs, rather than futures contracts. The ticker symbol of the ETF that I am in is HGD.to

I had a look at your site. Looks good. I will put a link to your site on my blog if you do the same.