Technical observations of RossClark@shaw.ca
As pointed out in the weeks leading up to the recent top in the precious metals a multitude of intermarket relationships and our indicators were producing signals that called for a significant downside correction. Gold has now retraced 62% of the rally from November and there is a bullish divergence in the XAU vs Gold (but not in the HUI, GDM or XGD.TO). However, the weight of the evidence points to a more sustainable low further down the road.
Once again, the GSR produced a warning signal leading up to an important downside reversal in the mining stocks. The RSI(14) reading of 89 was followed by high in the mining indexes within seven trading days. This RSI reading has now been accurate in 8 of 8 instances over the past four decades. Subsequent selloffs in the stocks generally result in an important low twenty-three days following the high close. This produces a targeted time window of April 17th.
Relationship with the US Dollar
The US Dollar Index entered a weekly downside capitulation mode last week while the Euro produced weekly upside exhaustion alerts. Although overextended, a price reversal in the currencies can take a few weeks to transpire. The previous occurrences (five in this decade and two in the second half of the 1980's) did not reverse until a weekly Sequential Buy Setup had been generated in the Dollar. It would take another two weeks of steady to lower closes to create a signal (73.03 this week and 71.67 next week). While a Sequential is not necessary, it would provide an even better catalyst for upside action. Independent of the Sequential we must note that all seven capitulations resulted in a correction back to the 20-week exponential moving average within eight to ten weeks of the initial alert. This provides a time frame extending out from the middle of May.
While capitulations are reasonably rare, each rally from an oversold condition in the Dollar back to the 20-week moving average when coupled with an RSI(14) reading crossing over 44 has produced a tradable interim low in gold and the senior mining stocks.
Commitment of Traders
The net long non-commercial positions have declined by 35k and the net short commercial positions by 46k. A reduction of another 15k or more would put the market in a much healthier position. The RSI readings of the COT data are back to neutral readings, but still shy of the levels we would view as lower risk by triggering a buy signal in our model. (The last signal occurred the week of June 29th at $650).
Retracement of preceding rally
Major price corrections in gold have a tendency to retrace 55% of the previous rally. We can define the rally as having occurred from the most recent pullback in November 2007 ($773), June 2007 ($641) or the low of $542 in June 2006. This provides targeted support at $890, $818 and $763.
CHARTWORKS - APRIL 2, 2008
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