Market Update

Clive Maund
Jun 28, 2006

Precious Metals stocks are believed to have bottomed, although we may see a test of the recent lows, and prices may dip marginally below them in coming weeks, any such retreat being regarded as a major buying opportunity. It is considered to be too soon after the recent plunge for a new intermediate uptrend to get underway. This being so we are likely to see some backtracking after the rise of the past couple of weeks, the psychology of this being that some of those who were stunned by the ferocity of the recent plunge, are tempted to bail by the higher prices, and thus temporarily cap the advance.

Before going further it should be noted that there is a potential Head-and-Shoulders top forming in the PM stock indices, although it must be emphasised that it is now regarded as a low probability that this formation will complete and it can only be expected to do so in the event of the broad market turning seriously lower. The way to handle this risk is to exit positions in the event that the HUI index (or XAU index which exhibits a similar pattern) breaks below the "neckline" of the formation shown on the accompanying chart. In the event of the index backing off towards this line in the near future, it will present an excellent across-the-board low risk entry point for many stocks, as they can be bought with the proviso that they are sold for a modest loss in the event of a closing breach of the H&S neckline.

So, taking the positive view that the bottom is in, what can we expect to see in coming weeks? Basically, a period of backing and filling roughly between the recent low and about where we are now. This base building is what we normally see after a reaction of the kind we have just witnessed, it allows time to sentiment to recover, making renewed advance possible. It is customary for such action to continue for sufficient time to allow the falling 50-day moving average to drop back towards the 200-day, and although it is not expected to close the gap completely, it will probably do so to large extent. This gives us a clue as to how long we can reasonably expect the market to mark time before a new uptrend starts. As we can readily deduce from the HUI chart (and various stocks), we are probably looking at a period of 4 to 6 weeks. Thus the current rally from the low is believed to be close to ending and is expected to be followed by a dip back towards the lows - a dip which sho uld be bought. Timing wise it is thought to be too early to consider call options, for the reasons just described, but these could be very advantageous if purchased towards the bottom of the developing base area in coming weeks.

On www.clivemaund.com we have just prepared a review of 36 Precious Metals stocks, which includes large, medium and small cap issues, in order that we can position ourselves for the anticipated new intermediate uptrend.

Jun 27, 2006
Clive Maund
email: support@clivemaund.com
website: www.clivemaund.com

Charts courtesy of StockCharts.com.

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