Market Wrap
Week Ending 10/23/09
Gold Stocks
The gold stocks, as represented by the GDX index, lost 3.48% for the week, to close at 46.69. Last week's report had the following to say on GDX:
Presently, GDX is testing support at 48. If this level does not hold, the index will most likely fill the open gap (blue horizontal arrow). More significant support resides further below at 45, followed by intermediate term support at the yellow band.
Notice that MACD is curling over, as if getting ready to put in a negative crossover. The histograms are receding and RSI has registered a negative divergence: a lower high, while price made a higher high.
The weight of the evidence suggests at least a short term consolidation/correction. A test of the break out area is likely (45).
Support at 48 did not hold and the open gap on the daily chart just below 46 looks like it is begging to be filled. Significant support resides at the break out area around 45.
Such price action would be nothing more than a healthy short term correction/consolidation. If it develops further, major support is shown to be at 41-43 as marked by the yellow horizontal band.
Note that as mentioned last week, not only did MACD look like it was going to put in a negative cross over - it did. Histograms have turned down into negative territory as well. If RSI breaks below 50 more downside action is likely. The biggest risk is overall stock market risk.
Next up is the weekly chart of the GDX that shows the rally from late 2008 (Oct. - Nov) with the various Fibonacci retracement levels overlaid.
If the short term correction/consolidation turns into an intermediate term move - only then would these levels come into play.
The upper yellow band is the first support area; and the tan ban below represents significant support.
I want to address a topic that has gotten a lot of action on my website (bulletin board) concerning the gold stocks. It is true, and I have written on the fact, that overall, the gold stocks have underperformed physical gold.
However, this is from the beginning of the bull market until the present; AND on a buy and hold or "total" basis. Until 2006 the gold stocks outperformed gold; and some stocks by extraordinary percentages; and recently that has once again occurred.
Notice the size (gain) of the rally out of the 2008 lows: it is over 200%. That is one heck of a performance. It is still true, however, that GDX is below its all time highs, and has underperformed physical gold on a long term basis since the beginning of the bull market.
However, there have been many opportunities where the gold stocks performed admirably. Timing and selectivity are imperative. The stocks have greater risk than physical, especially overall stock market risk. Caveat Emptor.
Next up is a chart comparing the performance of the Hui Gold Stocks Index versus physical gold. It is a daily chart that goes back to Feb. This goes to the above discussion.
From March until Sept. the gold stocks have been in a strongly rising channel: making higher highs and higher lows.
Since Sept. the ratio has turned down. Physical gold has been outperforming the Hui.
Notice that a lower high has been made. So far this is just a short term consolidation/correction within a rising uptrend; however it bears watching.
A negative divergence exists that will be resolved one way or the other.
Below is the gold to silver ratio. This chart shows whether gold is outperforming silver; or if silver is outperforming gold. The upper zone is the area in which gold is vastly outperforming silver.
Notice that in 2009 the ratio began to move down from the top of the upper zone. This meant that silver was starting to outperform gold. The ratio has changed 25% so far this year.
Silver, this past year - has been the place to be. However, during the "financial crisis", gold held up far better than silver, or any other asset class. Once again: it is timing and selectivity: risk vs. reward.
Several silver mining stocks have been highlighted on the stock watch list since the beginning of the year.
The above excerpt is a small sampling from the latest full-length market wrap report, available only at the Honest Money Gold & Silver Report website. All major markets are covered with the emphasis on the precious metals. Stop by and check out.
Good luck. Good trading. Good health, and that's a wrap.
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