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Commodities / Gold & Silver Stocks May 02, 2008 - 05:38 AM GMT

By: Brian_Bloom

Commodities

Best Financial Markets Analysis ArticleFrom a trading perspective, the charts are showing that it might be “buying time” in gold shares.

Let's look at three relationships:

  1. The relationship of the speculative $HUI to the less speculative $XAU
  2. The relationship of the $HUI to the gold price
  3. The relationship of the $XAU to the gold price

The daily chart above of the $HUI:$XAU (courtesy stockcharts.com ) shows a dive in the MACD into deeply oversold territory. The RSI is also in deeply oversold territory and appears to be bouncing up.

If we now look at the weekly chart of the same relationship below, we also see signs of encouragement

The first important point is that, in the longer term weekly relationship going back to July 2005, the 50 week Moving Average has remained consistently above the 200 week MA. Any bounce in the chart of the daily relationship will occur within the context of a Primary Bull Market.

The second point is that there are tentative signs of an uptick in the RSI

Now let's look at the $HUI relative to the gold price. On the weekly chart below there appears to be some significant support at the 0.46 level – which is where the ratio sat as at May 1 st 2008.

By itself, the above chart is not particularly revealing. Of course, if it falls any lower it will need to signify a change in trend relative to gold – which is certainly not apparent from the HUI:XAU relationship. It therefore follows that the 0.46 level is probably close to a bottom. It is more likely to bounce up than down.

Now, if we look at the XAU:GOLD relationship (which is/should be less volatile relative to the HUI:GOLD relationship) we see signs of a stirring:

Note the two blue arrows indicating the possibility of a “double bottom” and also note the series of rising bottoms in the MACD. By implication, if the XAU:Gold ratio breaks up, one would expect the $HUI to move up sharply relative to the XAU – which we have already said seems highly likely given the deeply oversold ratio of HUI:XAU in the first chart above.

Finally, the weekly chart of the XAU:GOLD shows a recent upside crossover of the MACD above its MA

Strictly speaking, this is nothing to get excited about – except that the daily chart is showing signs that it wants to stir. Given this latter fact, we might anticipate that the weekly ratio will break above its 50 week MA.

Conclusion

If you are one who likes to buy low and sell high, this is probably buying time.

Validation

The weekly gold price chart below shows a “possible” further fall down to around $800 an ounce. However ….

What is starting to look interesting is the relative positioning of the blue MACD bars (in oversold territory) and the RSI (at around the 50% level).

In a Primary Bull market, the weekly RSI will rarely fall far below the 50% level which, again, shows we might be close to a bottom.

Finally, let's look at the Point and Figure chart. I have selected a 2% X 3 box reversal chart merely because it shows an interesting picture.

What this chart shows is that, based on the “vertical” measured move technique, a level of $752 might be expected. But, in this analyst's experience, the vertical count is more reliable if it is forecasting a destination within its Primary Trend. i.e. If I have a  view that the Primary Trend of Gold is “up” then I will be more inclined to accept a measured move target using the horizontal count method. In any event, for “trading” purposes, I am generally inclined to want o believe the horizontal count target.

In this case, the horizontal count target is around $830/ounce.

If we look at where $830 is on the weekly bar chart above, it looks like that may well be a bottom.

Overall Conclusion

Whilst the gold shares may not rise in absolute terms in the short term, they look like they want to start rising in relative terms:  XAU relative to Gold, and HUI relative to XAU.

The gold shares seem to be looking to gold to reach a bottom and, if gold does bottom, gold shares might very well start to outperform gold on the upside.

Now looks like a good time to buy gold shares – if you happen to be a trader.

By Brian Bloom

www.beyondneanderthal.com

Author's note: In anticipation of the launch of Beyond Neanderthal, I am preparing an article which will begin to “open the kimono” on precisely what it is about gold that has been grabbing my attention these past few years.  To get the full story, you will have to buy the novel (for which you can register interest at www.beyondneanderthal.com ).  But the article should certainly pique reader interest. Let's just say this: It ain't about money.  Hopefully, it will all start coming together by mid May.

Copyright © 2008 Brian Bloom - All Rights Reserved

Brian Bloom Archive

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