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Those manic-depressive gold stocks

Clive Maund
29 April, 2005

Many precious metal stock holders are depressed and perplexed by the continuing deterioration in the prices of gold and silver stocks, which is hardly surprising as prices have continued to decline over the past few trading days, but as far as the metals are concerned NOTHING HAS CHANGED SINCE THE LAST GOLD AND SILVER MARKET UPDATES WERE POSTED. Gold has dropped minimally and remains in pretty much the same position as before, silver has dropped rather sharply, but it, too, remains above its long-term trendline, and as long as that holds, the outlook is bullish. The longer-term charts shown here demonstrate this clearly.

The malaise is in the stocks themselves, and so we will turn our attention to the long-term HUI chart to clarify what is going on. Remember, stocks are speculative counters to a much greater degree than the metals themselves, and therefore are subject to manic-depressive price behaviour - and I know from the emails I am receiving that we are very much in the depressive stage - the stage where those who bought at higher levels compulsively compound their misery by selling at, or near, the bottom.

Is it possible to determine with any degree of accuracy where this seemingly endless decline is likely to end? It certainly is, and so we will now look at the HUI charts in order to highlight the probable levels at which the retreat will terminate.

That the HUI index is weak at this time is hardly surprising, as it has broken down from the second uptrend channel shown on the 4-year chart, having double-topped last November with its highs of the previous winter. Almost regardless of the action in the metals, it is currently in a weak, corrective phase - however, there are signs that this corrective phase is getting close to terminating.

The first thing to notice on the 4-year chart is the huge underlying support around the 150 level. It is highly unlikely that this level will break unless the metals break down from their long-term uptrends. In other words, the current decline should go no lower than this level, at worst. We have referred to the importance of this level in the past. On this chart we can also see that the HUI index is at its normal oversold limit as shown by the RSI and MACD indicators. There is another important support level shown on this chart, which the index has now just about arrived at, which we can see much more clearly on the 2-year chart.

On the 2-year chart we can see this strong support at the lows of Spring and Summer last year. We see again the increasingly oversold condition shown by the RSI and MACD indicators, and by the position of the index relative to its moving averages. Of course, given the current weakness and propensity of the PM stocks to move with the broad market (which is not an automatic or permanent state of affairs), this oversold condition can get considerably worse, which is why, although there is a good chance that we are now at or close to the lows, the index may yet decline to the 150 area. In the event that this happens, we would would then be at a major buy spot, provided that the metals do not break down from their long-term up trends in the meantime.

Conclusion: it is unwise to get panicked out at this stage in the game. Traders who have "kept some powder dry" should soon be able to move in and pick up bargains, especially if the index does drop back to the 150 area.

In the obviously unlikely event that this interpretation proves to be incorrect, readers are advised to avail themselves of the words of a song by Bobby McFerrin, entitled "Don't Worry - Be Happy."

29 April, 2005
Clive Maund

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge, England. He lives in Chile.

Visit his subscription website at [You can subscribe here].

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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