-- Posted Tuesday, 30 May 2006 | Digg This Article
NOTE: Previous piece ‘Gold/HUI anomaly – Turnaround is there” click here
by Eric Hommelberg
May 28, 2006
What a week it was! Again we’ve been witnessing a volatile week in the gold pits being characterized by growing fear and plenty of sell recommendations.
So what to do next you wonder, what do the current technical indicators say? What about the Gold/HUI anomaly? Is Gold on its way towards its 200 dma as many analysts do predict? When will this bleeding stop?
Well, enough questions which deserve an update on my previous piece ‘Gold/HUI anomaly – Turnaround is there!’
As you may have seen some analysts do recommend to sell indeed upon a potential bounce in gold here.
Their reasoning goes something like this:
Since gold was so overbought lately gold will most probably return to its 200 dma which corresponds with a price tag of about $540-550 (depends how soon gold would reach its 200 dma). END.
As previously stated I disagree with a return to gold’s 200 dma at this stage since that would imply a break down below gold’s 35 year average of $572 (inflation adjusted), a level which served as a major resistance during the 1993-1996 period and finally taken out in 2006.
Once a long-term resistance is taken out it becomes solid support therefore I don’t see gold falling below the $572 level and therefore obviously no return to its 200 dma at this stage.
So if gold isn’t likely to go down to its 200 dma where could we expect to find some solid support instead?
Well, as stated in my previous piece ‘Gold/HUI anomaly – turnaround is there’ I showed you the importance of gold’s 50 dma lately. Let’s take another peek at that chart and judge yourself:
This chart demonstrates beyond any doubt the importance of gold’s 50 dma lately.
Right now gold’s 50 dma has risen to 627 which strengthens the support area already in place of $620 - $640. The $620 - $640 support area is defined by the 50% and 61% FIB retracement levels of the $551 - $730 move in gold lately.
Please take a peek at the chart below for the support levels:
This chart clearly shows the importance of the $640 - $620 support..
In fact the $640 level has been tested 4 times past week but so far without success!
No here’s an very interesting pattern developing.. as you can see gold’s down trend (A line) is still intact but on the other hand the $640 support held remarkably well past week.
Now the 50 dma is rising by about 2 pts a week which will bring towards the 640 area as well by the end of next week.
Also by end of next week the down-trend (A-line) will arrive there as well ($640 area) so for gold it’s make it or brake it time next week.
If the support area can hold (my guess is it will) then the down trend will be broken to the upside which could cause a sharp bounce in gold. Obviously this bodes well for the gold shares coming week.
Now, let’s take a peek at the HUI chart here, what happened to its up-trend since May 2005?
As this chart reveals the HUI flirted with its up-trend (A-line) several times past week but managed to close above. Since the HUI just bounced off its deepest oversold condition since May 2005 I don’t see much further down risk here.
Gold/HUI anomaly – Turnaround confirmed
As stated in my piece ‘Gold/HUI anomaly – Turnaround is there’ of May 19 the Gold/HUI ratio started to drop again which would mark the end of the gold share under performance vs gold.
Well, just after a week it becomes clear that the Gold/HUI ratio reached a major top indeed on May 18 and a more bright future of the gold shares seems to be upon us.
Although it doesn’t feel that way yet since the HUI hasn’t made a strong rebound so far, still it managed to outperform the gold price past week. The chart below tells it all:
Highlights:
- Gold/HUI anomaly is resolving itself these days
- HUI hasn’t recovered drastically yet due to a further decline in gold itself but managed to outperform gold impressively. HUI up 8 pts vs gold down $6 during last week (May 22 – May 26)
- Gold still in short term down-trend but finds solid support at v$640
- Gold’s down-trend line will cross the $640 area as well by the end of next week.
- Something has to give, either gold breaks out or $640 support fails
- In case gold breaks out of its short term down-trend gold stocks could fly since they will be outperforming gold for many weeks to come..
Eric Hommelberg & partners
The Gold Discovery Letter/
The Gold Drivers Report
www.golddrivers.com
-- Posted Tuesday, 30 May 2006 | Digg This Article
