Gold and Gold Stocks

Introduction

Last week's article "gold at a major top" has resulted in much feedback and comments from both the bull and bear camp. Price of gold did reach $480 this week and so far has retraced from that high. The jury is still out whether this is a major top or not, but that is not our concern since we trade our signals, not our analysis. This week, our focus is on the divergence between gold and gold stocks, and where our IP model stands as we have been eagerly waiting for that IP1 signal to buy and hold gold stocks just like we did in 2002 and 2003.

Gold - is in a bull market, period. Since bottoming in 2001, I've mapped out five consecutive swing highs (labelled SH#1 to #5), with each new SH higher than the previous SH. This is a classic extension of a bull market.

Gold stocks - as represented by the $HUI, in the mean time, has stopped producing a higher high after SH#3, back in Dec 2003. Therefore, a divergence has been in place when price of gold is making new highs while gold stocks are not.

This divergence and under performance by gold stocks is clearly illustrated by the $HUI:GOLD ratio chart. In fact, since topping in late 2003, the ratio chart has been making lower highs and lower lows, and until this trend is reversed, gold stocks will continue to under perform the price of gold. But fortunately, we don't have to wait till after the fact. Our IP model has enabled us to catch the awesome rallies leading up to SH#1 in 2002 and SH#3 in 2003, which so far in this new gold bull market, were the most profitable swings.

Here is that IP1 in March 2002 which led to SH#1.

And that IP1 in July 2003 which led to SH#3.

Oct 2005 - last week, price pierced the 50ema support intraday, but closed above it. This week, we have now two consecutive close below the 50ema, and with RSI below 50, the anticipated IP1 is now dead. It may still happen down the road, but it appears a larger correction is ahead of us.

Summary

With so much interests and attention given to the gold sector in the past few weeks, many readers of my articles have provided much feedback, and I appreciate that. One question always pops up, what do I think gold will do? To be honest, I don't know. Technical analysis is nothing more than an educated guess, sometimes we guess correct, sometimes we guess wrong. That is why it is so important that we trade the signals, not the analysis.

We've been on a sell signal since Oct 5, ending the buy signal from early September. Conservative traders are in cash, and aggressive traders should be short. No other positions are viable.

Jack Chan at www.traderscorporation.com

15 October 2005