Wow, what a turn around for gold stocks last week! After languishing for all of May the XAU rallied 6.6% off its Wednesday low by Friday's close. Many gold stocks made key reversals as they broke out of downtrend resistance lines while volume came into the gold market in a big way. I was looking for a rally, but the rally even took me by surprise. It seems that all of the weak hands got shaken out of the gold stocks over the past few weeks, and with those potential sellers gone it didn't take much buying to propel things higher.
I use the Worden Brothers TC2007 software to scan for stocks, track my holdings, and keep my pulse on the market. I've tried dozens of stock market analysis software programs and its my favorite. It's the easiest to use and at the same time one of the most powerful. One thing this program does is break the stock market up into over 230 sectors. The chart above is of the gold stock sector. Unlike the XAU or HUI it includes all of the gold stocks that trade on the major us exchanges and even has a composite volume indicator for them.
As you can see from the above chart there was a volume spike at the end of last week in gold stocks as they turned higher. If you look at a 60 minute chart of the leading big cap gold stocks you'll see huge block trades in many of them. Another thing you should notice is that the green on balance volume indicator(OBV) that is overlaying the volume lines above made a new high last week, suggesting that gold stocks are under heavy accumulation.
Invented by Joseph Granville, on balance volume is designed to track changes in volume over time. It is the running total of volume calculated in such a way as to add the day's volume to a cumulative total if the day's close was higher than the previous day's close and to subtract the day's volume from the cumulative total on down days. The assumption is that changes in volume will precede changes in price trend.
Rising on balance volume occurs when there is more volume on up days then down days in a stock. It tells you that the buyers are more active in the stock and that it is under accumulation. Chartists who use on balance volume work on the assumption that changes in volume will precede changes in price trend. A rising trend in the OBV gives signs of a healthy move into the security. A doubtful trend, or sideways trend in the OBV leaves price trend suspect and a candidate for a reversal of the trend. A falling OBV trend signals an exodus from the security despite price activity and leads to the caution that price may follow.
Ike Iossif of marketviews.tv, has pointed out to me some key patterns with on balance volume in regards to gold stocks. When the OBV in the gold sector makes a new high it almost always happens either at the start of a new bull run in gold stocks or at the end of a bull run in a buying climax. Well, we certainly are not at the end of a bull run as gold stocks have been trending sideways in a long consolidation phase for over a year.
Instead the new high in on balance volume last week suggests that there is heavy buying pressure coming into gold stocks that should lead to even higher prices. That is why they were able to jump up so quickly at the end of last week. The potential for a blast-off to new highs in the XAU in the next few months is high. The big buyers in gold stocks is just one of the signs.
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