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Gold and Silver stocks continue their march higher

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On Friday, the Gold/Silver Index (XAU.X) recouped all of it earlier losses in the week and managed to finish the week with a gain. Today's action has this group of stocks surging higher to a new 52-week lows as the recent weakness in the U.S. Dollar has gold bugs looking for inflation to rear its head at some point in the future. With the XAU.X breaking above our "old" upper-end of retracement, we're going to roll up retracement yet again on the group and give bulls a new target to be shooting for.

Gold/Silver Index Chart - Daily Interval

The only "reason" I can come up with for the recent bullishness in the gold/silver sector is the weakness in the US$ in recent weeks. However, we don't find good correlation between the two on a continual basis. The more logical reason for bullishness is simply that DEMAND is in control. Dorsey/Wright and Associates charts the Gold/Silver Index (XAU.X) on a $2 box scale, and this is most likely what institutions are using to manage their positions. The $2 box scale has a bullish vertical count of $106 associated with its chart. With retracement from the lows found in November of 2000 and 61.8% retracement fitted to a relative high of 05/18/01 that really looks to have been a "pivot" point and support back in April, sector bulls have a good target built in at $94.16. While the sector looks overextended right now, try telling that to a bear that has had little success shorting the group in recent weeks.

Gold/Silver Mining Stocks - Sorted by volume

Mining stocks are "hot" today and its interesting to note that this group is perhaps getting more "speculative" as two of the most actively traded mining stocks today are "penny stocks" and showing some rather large gains. This type of action can indicate that investors are starting to hunger for exposure to precious metals mining stocks. When it reached "euphoric" levels, that's often times when a top is encountered.

Stocks trying to firm at lows

After dropping to session lows in the first couple of hours of trading, we're starting to see some intra day consolidation take place.

Sector weakness continues to be the GSTI Software Index (GSO.X) 129.75 -3.61%, but since our 11:00 EST Update on OptionInvestor.com, we've seen sideways action as this group hovers right near the mid-point of its downward regression channel. It's very interesting to note just how this mid-point of regression looks to be a level of focus today.

GSTI Software Index Chart - 30-minute interval

Earlier today on OptionInvestor.com, we thought bearish trader in technology would want to see the weaker software sector as depicted by the GSO.X close below the 130 level. It's interesting to see just how the mid-point of downward regression does look to be in play today. The group has actually found a bit of a bid in the last 30-minutes (a single bar) and may try and edge back up to the 132 level. Short-term bearish traders want to see the recent gap higher get filled to the downside near 125, but the filling of gaps to the downside has been a bit of a problem recently for bears due to continued short-covering as position get squared. That type of thought comes from past observations of the NASDAQ-100 Bullish % ($BPNDX) having been oversold and market makers getting their inventories back to a more "neutral" to slightly bullish weighting.

Jeff Bailey
Senior Market Technician
Option Investor

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