CHARTWORKS #2 - JANUARY 2, 2007
Gold - On Track for a Decent
Technical observations of RossClark@shaw.ca
Jan 4, 2007
Technical measurements continue
to point to $775 for the next leg of gold's bull market while
stock gold indices have targets 27% to 32% above current levels.
An interim high should be anticipated
For traders, risk should be
controlled below the lows of the past two weeks.
Related mutual funds (i.e.
Sprott Gold and Precious Metals Fund, Sentry Select Precious
Metals Growth Fund, etc.), the Exchange Traded Funds (GDX
& XGD.TO) or options on the indices can provide a diversified
means of investing in the sector.
The drop in the XAU/Gold ratio into November created
an important setup. The advance from October 3rd was more than
0.01 and the decline into November 20th made a higher low. On
December 4th the ratio reversed up through the resistance of
0.228 of October 25th. Gold prices generally setback for six
to thirteen trading days following the breakout and this now
appears as in place as of December 18th (10 trading days).
Update of October 29 review:
XAU vs Gold (Homestake used for analysis purposes prior to
1982). For the past thirty-five years we have seen the beginning
of most of the important gold rallies lead by strength in the
mining stocks. This only makes sense, because of the leverage
factor available in the earnings potential of commodity based
In the biggest rally (1971
to 1974) gold prices rose by 39% per annum. During that period
there were six instances where the ratio of Homestake/Gold made
a significant pullback (greater than 0.01) to a higher
low and then broke out to the upside. Each breakout coincided
with the beginning of an upward move in gold prices. In the 1976
to 1980 rally (annualized advance of 35%) there were five
such timely 'breakouts'. The 2001 to 2006 rally (annualized
advance of 14%) has seen seven 'breakouts', the last one
being December 15, 2005.
Red arrows on the following
chart identify the last two major signals. Blue arrows identify
short term signals.
The most recent COT data showed
a decline in the net speculative long position and commercial
short positions by over 11,000 contracts. At 69,893 contracts
the speculative positions are still 60k below the levels seen
last spring. We should have little need for concern until the
positions grow well beyond 110k and produce an RSI reading over
60. (The current RSI reading of 41 is close to generating
a new buy signal).
The action in the mining indices
(XAU, HUI, GDM & XGD.TO) is on the verge of completing a
well defined base. There are many ingredients that correlate
with previous bases (see next page) and make it possible
to establish guidelines as we move forward. The similarities:
- An A-B-C decline into June
- Followed by a rally back to
the volatility band coupled with an RSI(14) reading in the mid
60's during July
- Then a series of re-tests
of the July resistance
- An almost vertical drop to
test support in October
- A rally back to the resistance
line (from the closes of May 10th & September 5th)
- A move above 0.23 in the XAU/Gold
ratio (through its resistance level) confirming leadership in
the stocks. Then a 10 day correction in gold (normally 6 to
13 trading days from the breakout in the ratio).
- A re-test of the breakout
line (December 21st) taking the accepted three weeks that was
noted in the commentary of November 28th.
What to watch for as we move
- A breakout in gold of the
December highs and the 89-day standard deviation band (currently
- A measured move in the stock
indices that is equal to the depth of the consolidation pattern.
Examples of similar
Measured targets that
should be attainable in the next phase of the bull market
click on images to enlarge charts
We are approaching a Pi cycle
date of February 27, 2007. Pi times 1,000 (3,142 days)
and its 1/8th subsets have been very reliable turning points
in the gold market. We established trading rules in the 1980's
that identified important highs around the date and lows in
the weeks following the cycle date.
In a rising market the cycle
date offers an opportunity to lighten up on long gold related
positions and reestablish them on a hard break. For traders
we will be looking to sell into to mid/late February. Longterm
investors are advised to look for a pullback to add again in
The stocks generally top first.
We've found that a daily CCI(8) reading over 90 in the XAU within
10 trading days of the Pi date has been an optimum signal to
lighten up on the mining stocks. If the XAU is unable to generate
an overbought reading within that time window then a trailing
stop should be used to exit longs.
The optimum re-entry for mining
stocks and bullion occurs once the CCI(8) becomes oversold in
gold following the Pi cycle:
After 8 trading days; buy any
reading under -150
After 15 days; add a buy-stop above a trailing 20-day high
If no signal by the 20th day then add an additional criteria;
buy on a CCI(8) crossover of -100
Using these rules the XAU has
produced declines (re-entry opportunities) of 12%, 13%,
10%, 12%, 20%, 10%, 13% and 8% in recent years.
CHARTWORKS #2 - JANUARY 2,
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