Update (5/18/07): The HUI ended the week by closing up 1.9% on Friday. We will be looking for the HUI to post a few progressively higher closes above support at 330 before we are convinced that the we have seen the bottom and should add to positions. Head-fakes tend to be very painful, so it is prudent to wait for confirmation before jumping back in.
May 16th was a bad day for gold and silver stocks and could be a sign of things to come. The HUI declined 1.2%, but more importantly it broke through support around 330 and proceeded to dip towards the next level of support around the 322 mark. 330 represents the 70-day moving average and the bottom line of the upward channel. The chart below illustrates how reliable this support line has been over the past 8 months.
Unfortunately, the technicals also suggest that the HUI could be in for a much deeper correction if support does not hold. Both the RSI and MACD indicators have plenty of room to drop before being oversold. A freefall towards 300 is not unfathomable.
The HUI at 322 represents the lowest it can dip without breaking the bullish consolidation pattern of increasingly smaller corrections. There have been a series of 4 corrections within the consolidation period and each correction has been less severe than the prior one:
Correction #1 (May 11 – June 13 2006): 411 to 271 (-34%)
Correction #2 (Sept 6 – Oct 4 2006): 369 to 275 (-26%)
Correction #3 (Dec 5 – Jan 10 2007): 363 to 306 (-16%)
Correction #4 (Feb 23 – March 4 2007): 362 to 315 (-13%)
Correction #5 (April 16 – ?): 370 to ? (X%)
The HUI dipped below 322 for about 15 minutes today, but quickly bounced off this support level and rallied back to 325 where it closed the day. Although losing support at 330 was very concerning, it was promising to see the HUI bounce off support at 322.
Gold stocks are truly hanging in the balance. If support at 322 is violated again, we expect a fast and furious decline towards the 300 level before the HUI finds support. However, if the bounce off 322 is any sign, we could see a rally in the coming days that takes the HUI back towards resistance at 369. Either way, we expect gold to shift out of neutral and pick up speed very soon.
Our technical analysis is hinting that the direction will be to the downside, but this is only one piece of the puzzle and much will depend on whether the dollar can continue its recent really. Accordingly, we are reducing our exposure to gold stocks while keeping core positions. We maintain a long-term portfolio which is seldom touched and a short-term “trading” portfolio in which we attempt to capitalize on the volatility of the gold, silver and energy markets. The long-term picture has not changed. We still foresee gold breaching $800 and the HUI blowing past 400 before the end of the year. But it might be prudent to have cash available to take advantage of what might be the last buying opportunity of 2007.
To keep up to date with our thoughts on the direction of precious metals and energy, please subscribe to the email list by entering your email at the top-right of our site.