The XAU gold/silver index closed the latest week at 140.51, relatively unchanged for the week but above its low from last week. Also, the XAU closed just barely above its 15-day moving average for an early sign that just maybe a short-term bottoming process is already well underway. The Amex Gold Bugs Index (HUI) closed more decisively above its 15-day MA on Friday and finished the week at 320.64.
A couple of things are significant about the recent pullback in the mining stock sector. First, while the number of new 10-week highs on our list of 50 actively traded mining shares shrank significantly for a period of a couple of weeks (including on a rate of change basis), the number of new lows were virtually non-existent throughout. That is, the overwhelming majority of mining shares held above their previous 10-week lows. The number of net new highs shows better than price itself the incremental demand for stocks on a rate of change, or momentum, basis. This is the basis for our set of hi-low momentum indicators (HILMO) to measure short-term variations in the demand for gold and silver shares.
The second factor worth considering is that at no time during the pullback/correction did the XAU or HUI mining indices break below either the 60-day or 90-day moving average. This signifies that the dominant interim trend is still technically up. Since these important moving averages are also still rising at a good rate of change, it also holds forth the potential that higher highs can be made in the interim before the next major top in the mining share sector.
The gold stock advance/decline (A/D) line (see chart below) has shown marked improvement in just the past few days and has retraced most of its decline from the previous two weeks. This indicators measures the number of advancing minus declining shares among the 50 actively traded gold stocks each day and is one measure of market breadth. We're waiting for a little more improvement in the A/D line, and it wouldn't take much for the A/D line to exceed its previous high, thus sending a positive divergence signal relative to the XAU. This hasn't happened yet so it's too early to jump the gun, but it's not an unreasonable expectation.
It could still be a while longer before either the XAU or HUI are ready to break out to a new high. But within the mining stock universe there will be stocks that will continue to make new highs, even as there will be laggards. This could equate to a trading range for the indices for a while longer until enough consolidation has taken place to rid the sector of the excess internal weakness that built up in past weeks (not to mention absorbing the excess supply of shares that was spilled onto the market by those traders who ran for the exits as soon as the market broke earlier this month).
Among the silver mines, selling pressure has been extremely light recently compared to other areas of the metals sector (copper in particular). In fact, hardly any stocks at all on our list of actively traded gold and silver shares have been found to show up on the 10-week new lows list. This shows that the internal situation, though somewhat weak, hasn't deteriorated much despite the earlier February pullback and there is now intense selling pressure so far. The new highs/new lows indicator for the silver shares is in better shape than that of the gold stock hi/lo indicator, short-term.
In fact, most of the stocks making the new highs list on Friday, Feb. 24, were silver shares. This is positive in that the silvers tend the lead the gold shares and as long as a fair number of actively traded silver stocks are showing up on the new highs list each week it reflects a relatively healthy market. Only when the silvers start diverging lower to the golds (or worse, when silver stocks begin showing up on the 10-week new lows list) is there a reason for major concern.
Yet another indication that selling pressure is gradually lifting is the number of mining stocks below the 15-day moving average. Each day the number of stocks below the 15-day MA has been shrinking, and as of Friday, Feb. 24, the number of gold stocks on our list above the 15-day MA outnumbered the stocks below the 15-day MA for the second time this week. This is a good sign, but it needs to continue at least a few more days before we have confirmation of a bottom. The actual number of stocks below the 15-day MA as of Friday's close was 17. That's a big improvement from the past several days when the number ran in the 20s and 30s. Ideally, the number of mining stocks on our list below the 15-day MA should number fewer than 15 in order to signify a healthy market. We are very close to that number right now. Hopefully with time the market can show additional internal improvement.
Some of the actively traded silver stocks were strong performers this past week with market leaders Western Silver (WTZ) and Apex (SIL) posting solid gains. WTZ in particular showed that momentum is still a force to be reckoned with among the silvers as it skyrocketed over 30% in just a couple of days. There should be other silver shares joining the list of new highs soon. When the silvers lead the way, it's usually a good indication for the gold stocks in general.
To summarize, the short-term for the overall mining stock sector as measured by XAU and HUI is still relatively unsettled as reflected by the short-term internal indicators. The dominant interim trend and bias for the sector remains positive, however, as reflected in the 60-day and 90-day moving averages of most actively traded gold stocks, as well as by the lack of new lows in the list of gold and silver stocks making 10-week new highs and new lows. But we're still waiting for confirmation that the latest correction phase has ended for the broad gold stock market as measured by the XAU, and are awaiting an improvement in the shorter-term HILMO indicators. We'll also need to see even more gold stocks getting -- and staying -- above their 15-day moving averages in the next few days.
That said, there is still enough upward momentum to allow for profitable trades among the best performing gold and silver stocks, especially those that have recently joined the new 10-week highs list and are making higher highs and higher lows on a regular basis. Short-term traders should focus mainly on those stocks which already have made a higher high relative to the XAU. There are even a few potential short-term turnaround candidates among the laggard silver shares (discussed below) for the more aggressively inclined traders. The overall trend for the spot gold market remains bullish as reflected in the 30/60/90-day moving averages.
