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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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Gold Stocks at the "Rim" of the Bowl

After a scary $12 decline in the gold price on Wednesday, Feb. 25, many traders and investors are wondering if the recent fall in gold will translate into an equally precipitous drop in the actively traded gold stocks.

A reader writes concerning the gold/gold stock market, "I would point out that the gold stocks as a group tend to anticipate the movement in gold. Therefore, as gold reached $430 soon after the new year, gold stocks refused to confirm the new high. Then it is telling that gold tanked in less than 6 days of the new high.

"Now, the reverse is happening. On Friday, as gold reached the low in the new year at around $397-8, the gold stocks as a group refused to confirm the low. The last time when gold was near this level around late January, gold stocks were about 4% lower!

"If the price of gold would break the support and go down from here, Friday (Feb. 20) would have been the perfect opportunity for gold stocks to go down big. But that did not happen. Friday is usually the ugliest day of the week for gold stocks. Judging from the percentage decline point of view, on Friday gold's decline of -2.91% compared to gold stocks' decline percentages (HUI -3.28%, XAU -2.68%, GOX -2.24%) is also telling. Last time when gold dropped to this level, the decline in the gold stocks was quite a bit larger."

"Even your favorite gold stock indicator, FCX is doing very well. The last time when gold was at this level, FCX was priced at around $36, and Friday at around $41...FCX is also a major copper producer, and copper was at an 8-year high last Thursday."

Very insightful comments and much appreciated. So is the gold stock correction over? Let's take a look at a leading blue-chip gold stock to try and get some insight. Below is the daily chart of Placer Dome (PDG). Notice the potentially bullish parabolic bowl in this chart. PDG precisely tested the outer "rim" of the bowl on Wednesday, Feb. 25. The test of the rim was successful, but we must wait to see follow-through on Thursday to see if this will bowl will remain unbroken. Considering the bullish crossover signal in the stochastic indicator for PDG on Wednesday I believe the chances favor this bowl remaining intact. A breakout above $17 will signal that the bowl is alive and well and that should usher in a re-test of this month's previous high.

Along these lines, another reader wrote to me the other day with the following observation: "I've just drawn a parabola on the 8-year chart of the HUI index and noticed that we may touch the side of the bowl in a couple of months. My question is, will this be the time to unload in a big way if the chart breaks decisively through the side?" My answer is that a breakdown of the bowl would obviously be a bearish development, but we aren't there yet so as long as the bowl remains intact we must consider the dominant trend to be still up.

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