Technical observations of RossClark@shaw.ca
The mining stocks have regained the investor enthusiasm seen in 2003. Interestingly it is coming as the rally is now 34-weeks old. (The 2003 rally was 36 weeks). However, this rally is exhibiting even greater overbought readings in my indicators than seen at the 2003 high. It matches levels that have only been experienced seven times in the past 105 years. It is now time to become cautious.
We have built an amended XAU index to incorporate all the Homestake Mining data that was available before the XAU was created. Using this index we find that the combined levels of the current upside readings in my Exhaustion Index and Summation Index have only been seen in 1908, 1916, 9/22/1933, 10/10/1980, 12/31/1983 and 4/24/1987.
Historically, the overbought signals in the oscillators tend to be concurrent with the price high or lead it by up to two weeks. Price declines have then been in the magnitude of 15% to 40% within eight to ten weeks. The catalyst has been a loss in upside momentum and the easiest way to recognize this is a week with a lower low.
Support can be anticipated to be tested at the 34-week exponential moving average. The moving average currently sits at 110.90 and is rising at 1.5 points per week. Assuming that it takes 10 weeks to reach the average and that the pace of its advance slows, the likely support level would come in at 121 to 123. This would be within the parameters of the typical corrections.
This support will also be in the vicinity of the rising trendline drawn off the May & August 2005 lows.
The junior mining stocks are always more volatile than the seniors so a larger correction can be expected in this group.
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