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XAU vs. XOI in September

The month of September will likely be a month where two major natural resource sectors diverge after both enjoying impressive bull markets through 2003 and most of 2004. The two sectors in question are the oil stock sector, represented by the Amex XOI index, and the gold stock sector, represented by the XAU index.

The XOI Oil index is currently peaking along with the price of crude oil, and XOI will most likely trend sideways-to-lower in September. One way of expressing this in technical terms is to observe the price trend of XOI relative to its 30-day, 60-day, and 90-day moving averages (dominant short-term MAs). After trending higher above the rising 30/60/90-day MAs for the past two years, XOI broke below the 90-day MA on a closing basis before rallying back above it last month. Despite currently being above the 30/60/90s, these moving averages are out of their proper alignment, and with the previous break below the 90-day MA serving as a warning, XOI's uptrend looks quite toppy.

The XAU index, on the other hand, has already undergone a lengthy corrective phase in 2004 and after trending below the falling 30/60/90-day moving averages for the past few months has recently broken above all three of them, most recently closing above the 92.00 level. Not only is the XAU above this important moving average triage but the moving averages are in their proper alignment. This strongly suggests a rally for XAU in September.

With respect to the XOI Oil index, the crude oil trend in general is currently topping and by the end of this year we should see oil prices back below $40/barrel. This eventuality is being signaled in the XOI index, as well as the crude oil chart itself. The trend toward rising oil and oil stock prices is coming to an end as we near the fourth quarter of '04.

The XAU, meanwhile, has been diverging to the upside relative to the broad market as represented by the S&P 500, another positive technical sign in the short-term. XAU should have a favorable month of September to reward the patience of those who have waited through the grinding market trend of the past 3-4 months.

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