On April 5th, we wrote that gold stocks were on the verge of a breakout. The HUI did indeed break key resistance around 360 and charged higher to 369. Sentiment turned positive and many gold bugs began licking their lips. However, the breakout failed to confirm and the HUI has since fell back to around 335. That is nearly a 10% decline from the recent peak.
Experts were chiming in with a myriad of reasons for the decline. Some say gold failed to react to dollar weakness, while others claim the U.S. economy is actually chugging along fine and the dollar will find support based on recent strength in the manufacturing index. And even technical analysts are showing sell signals.
But sentiment always tends to swing too far in either direction. The human element in the market causes overreactions on both sides of the pendulum and this effect is even more pronounced in the gold market, which is already a roller-coaster ride. It is just as the chorus begins to crescendo that you should turn around and run in the other direction. Of course, it takes an incredible amount of courage to play the contrarian and most investors have a hard time running head-first into the crowd.
So instead of getting cold feet, one might use this recent selloff (10% from 369 peak) to increase positions. From a technical standpoint, everything is still in tact so long as the HUI finds support around the 330 level. The triangle is still ascending and the series of increasingly smaller corrections still holds. In fact, the HUI would need to drop below 321 before this mini-correction would break that cycle and signal a serious correction is underway. Good luck and happy investing!