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:

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4)5)

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

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.


-Danny

DannyMerkel@hotmail.com

Analysis of the US Dollar and Gold Stocks

Gold dropped about $26.00 dollars an ounce this week, and gold stocks fared even worse, with the XAU losing 6.6% for the week. In the previous post I wrote on Tuesday, I said that an explosive move was likely due. Hopefully, from what I have been writing recently, you were able deduce which way I thought that move would be.

The following chart is a daily chart of the HUI index. I posted this same chart on April 13th, and I am posting it again since I think that it explains what has happened this week:

The central theme of the above chart is that gold stocks tend to correct in three waves, and this correction was no exception.

One of the reasons that gold stocks performed so poorly this week is because the USD has broken out of a triangle formation, which was building up for the last 3 weeks:


Notice how volatility, as measured by bollinger band width, signaled this breakout. The same indicator that was used in the above chart helped show me that a breakdown was due for gold stocks.

The next chart, which took me about 15 minutes to annotate, shows the Euro on the top panel, and what I call an intermarket MACD on the bottom panel. The last time I showed this type of chart was in this post.


As you can see, there has been a negative crossover on the MACD, which has triggered a Euro sell signal. A declining Euro will likely put pressure on gold prices, and also may drag Crude Oil prices down as well.

On the bright side, gold stocks are starting to near some potential areas of support. The following chart is a daily chart of GDX:


If you are a long term precious metals holder, like myself, then you could probably take some solace in the fact that GDX is nearing an unfilled gap, which may offer support. We'll have to wait and see what sort of candle emerge at this level.

Furthermore, silver prices are within 10% of a major area of support, which means the amount of pain left for the silver bulls to endure is certainly limited:


So the bottom line is that the US Dollar will likely rally for the next little while, and this means that the gold stocks correction is not quite over, but there is certainly some light now visible appearing at the end of the tunnel.

I will try to write a mini post on Tuesday again.

A Brief Look at Bollinger Bands

The following chart shows a gold index called the Dow Jones United States Precious Metals index, (DJUSPM). The index has a different gold stocks composition than the HUI or XAU Indices, and, as such, can sometimes give you a different perspective.


The main point in the above chart is that this index continues to trade sideways, within a very narrow band. As this is occurring, the bollinger bands are beginning to tighten, and the width of these bands are shown in the indicator on the bottom panel.

In my opinion, explosive moves, either up or down, are preceded by times of extremely low volatility.