The Gold stocks have failed to deliver on my expectations of a move higher and it has caused me to re-think the direction of the yellow metal.
The past few weeks I have suspected that Gold stocks and Gold was a corrective pullback but should have been a shallow pullback, relative to the ideas I was expecting. With the breakdown in the $HUI, it strongly suggests Gold and the Gold stocks could be in some trouble.
When you look at this chart, you can clearly see that the Gold stocks and Gold move well together, but it's when they diverge that it becomes an issue.
The $HUI has been underperforming the price of Gold for a number of weeks, but it's the latest breakdown that should be of concern to the bulls in both markets.
Back in April last year whilst Gold has hovering around the $1650 area, those that were watching the Gold stocks were one clue ahead of the move as it was suggesting that there was an arbitrage between the 2 markets. The same is setting up again, clearly one market is either behind the curve or ahead of it.
If we look back to the prior fractals from last year we can also see we have a similar fractal playing out in Gold, it's one of the reasons I strongly suspect that the recent price action we have seen on Gold is not bullish at all, as I have tried to give the bulls many opportunities to rally the markets higher, it appears they have failed to so do.
Even with a new round of QE, (is it QE4, 5 I lost track) the metals can't get a bid, as the US$ sold off heavily this week the metals showed little upside to that US$ reaction, that should be a concern to the bulls and the fact we saw Gold and Silver push lower with the US$ is in my opinion a vital clue that we could be playing out a similar fractal from last year.
Whilst Gold remains under $1750, short term it remains in a bearish trend and I think the $1680 support area will likely get tested and be broken, for a sharp move towards $1620-1600.
When you look at the $HUI and the failed break out above the granite floor, it looks like a failed retest from below.
Having initially it my target back in May 2012, I had strong hopes that the Gold stocks would lead the charge higher and drag yellow metal with it, but the weakness shown in the $HUI is a concern for me to remain bullish on Gold short term as I think the Gold stocks are speaking and a lower target of 250 is not out of the question.
If the prior low "gives out" then I don't see much support until the lower target around the 250-270 area.
The failure at the underside of the granite floor in 3 waves from an Elliott perspective suggests that the move is a 3 wave bounce and likely part of the trend that started back from its high in Sept 2011.
If we are to see more downside in the Gold stocks I fear it's going to drag Gold lower just like before and looking at that arbitrage between the 2 markets, Gold could be near a nasty move lower if the $1680 support gives out in a big way.
To negate this setup, I really want to see the Gold stocks reverse from this current down trend and Gold to follow higher and rally aggressively above $1750, the fact it's not showing any strength with the US$ moving lower, should be a concern to all bulls in both Gold stocks and the yellow metal.
If we take a look at the largest weighted stock in the $HUI we can see a similar pattern, so it pays to watch the biggest stocks as they have a large effect on where the $HUI is likely going.
According to this source http://en.wikipedia.org/wiki/HUI_Gold_Index GG has a weighting of 16.20%, I don't know if that is true but it sure seems a lot for one market.
Now if we overlay that with the $HUI.
So GG is to the $HUI as AAPL is to the NDX. If you follow Goldcorp you can see where the $HUI is likely heading and it don't look at pretty picture on GG.
Let's look at another stock from that list.
Barrack Gold (ABX)
When we look at this chart, we can see it has a similar appearance to the $HUI and GG. With a weighting of 15.37%, that's 2 stocks with a combined weighting of 31.57%.
That's impressive that 2 stocks have that much weighting, with both stocks in a down trend, it seems a that the bulls need to see those two stocks break out to the upside or reverse their current trends before we can get bullish on the $HUI.
Let's look at the 3rd stock from that list.
Newmont Mining Corp (NEM)
This is the bearish of the 3 stocks shown as we can see it's almost back to the prior lows and if you look carefully there appears to be a text book 5 wave impulse move, so not a pretty sight in the 3 major stocks in the $HUI.
Just looking at the 3 major stocks in the $HUI, it would appear that Gold stocks are in trouble and I suspect further downside is setting up.
If we are in a similar situation from last year, when the $HUI was leading Gold then I suspect we are about to see a new leg lower in Gold to catch up with the Gold stocks.
Until next time,
Have a profitable week ahead.