The XAU gold/silver index continues to show strong momentum and relative strength in the early going of 2006. Despite January having a record for showing weakness in the XAU, carry-over momentum from the second-half 2005 rally has pushed some gold stocks to record levels entering the New Year. There is still upside potential for many of the actively traded gold and silver shares in the near term, as we'll discuss here.

Meanwhile, spot gold continues to rally above its dominant interim trend lines. As we've pointed out in previous commentaries, it generally pays to follow the trend of the 30/60/90-day moving averages. And with gold staying above the 60-day moving average in last month's sharp pullback, it confirmed that the trend was still alive and favored higher highs. Gold is closing in on $550 and still has the benefit of upward momentum as reflected in the moving averages.

As a follow-through to last month's article, "A Santa Claus rally for the gold/silver stocks," it's nice to see most of the gold shares reviewed in this article showing nice gains over the past few weeks. Many of these stocks are at new highs, and some profit taking is in order, especially for those stocks that have outperformed the sector.

Among our leading indicator stocks, Freeport (FCX), Newmont (NEM), and Inmet (IMN:TSX) all made new highs this week. NEM breaking out above $58 pivotal resistance was particularly gratifying to see, an increase of $10/share since our last review of this leading blue chip.

Back in November, we reviewed Northgate Exploration Ltd. (NXG) a good low-priced turnaround candidate from both a technical and a fundamental standpoint. Since then NXG has led the list of momentum stocks in the GSR 50 mining share index, consistently making new 10-week highs on a rolling basis. In fact, NXG is also now at a 52-week high and has gone from the "turnaround" category to the "momentum" category among gold shares. Some profit taking would be in order. It's next major test is the October 2004 benchmark high at approximately $2.25.

The leading silver shares have benefited greatly from the Santa Claus rally. Among the top performers are Silver Wheat (SLW) and Western Silver (WTZ). Silver Standard Resources (SSRI) was mentioned in last month's commentary as being a high probability candidate to make higher based on momentum factors and has since then pierced above the December high in early January, closing most recently at $16.50. Silver Standard has joined the list of turnaround stocks morphing into momentum stocks. SSRI still trends above its rising 30/60/90-day moving averages and has more upside potential in the near-term based on momentum considerations.

Pan American Silver (PAAS), one of our top short-term turnarounds since early November, made a recent high at $20.50. The only stock in our review that failed to perform per expectations was Apex Silver (SIL), which has since lagged visibly and has broken below its 90-day moving average.

From a momentum standpoint, there is still room for a further rally above the recent high at the 140 level in the XAU gold/silver index. A rally up to 145 is expected; with a test of 150 a strong possibility before strong resistance is encountered. You may recall that the 150 area begins a 10-year resistance in XAU stretching back to 1996.

Internally, the gold stock advance/decline line continues to push forward despite the weakness of the past couple of days. The cumulative A/D line made a new 52-week high at +212 this week. Meanwhile, the 10-week new highs/new lows cumulative line also made a new high at +569. While the internal momentum of the gold shares has slowed a bit over the past few days, it's still nonetheless present in the sector and favors higher prices in the near term. The 10-week new highs (measured daily using our index of 50 mining stocks) is one of the best reflections of near term momentum in the mining stock sector.