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Fear Returns to Gold Stocks - Mike Swanson (8/29/06)

Submitted by Mike Swanson on Tue, 2006-08-29 08:05.

Gold fell $10 yesterday while the XAU dropped over $2.00. It was disappointing, because going into the open it appeared that gold and gold stocks could easily breakout and start their next big rally this week, one that would take them to their 52-week highs. People are now scared again.

Gold stocks are still in their trading range, consolidating, and getting ready for another big move. Everything points to this move being up and unless gold and gold stocks were to break down and close below their supports I have to assume that they are still going to go up.

This is the type of thing that happens when a stock is in a trading range - when it gets near the top of its range it looks incredible and then when it pulls back and goes back down near support everyone gets scared. The lack of resolution drives some people to sell, but the smart thing to do is to sit, wait, and let things resolve themselves. Times of consolidation also bring multiple false signals that fool people too.

Remember two weeks ago it looked like gold stocks were going to break down and I trimmed my margin position as a result. Gold dropped one more day and gold stocks were back on their recent highs just a few days later. I'd expect something similar to happen now. In fact things looked worse then - because the drop began with gold stocks falling and gold just sitting there. This time gold and gold stocks fell in tandem, which is what happens when they are just having a quick pullback. If gold stocks were to break support with the metal going up then I'd be worried. But this didn't happen yesterday.


Support on the HUI is at 325. The XAU, HUI, and gold are now oversold on their 60-minute stochastics so I'd expect them to turn up by the end of the day. Instead of breaking out this week it looks like the gold stocks are going to consolidate another week, which would cause the bollinger bands to practically touch. Remember the longer gold stocks consolidate the greater the coming breakout will be.

It's hard for people to remember that when they watch a down day. Pessimism has now returned to the gold markets. I got several emails from people frightened by yesterday's drop. Once again people are worried about the potential head and shoulders top or a big commodities meltdown. I addressed both of these fears in these previous articles:

Will Gold Stocks Fall with the Stock Market? - (8/21/06)

WSW Power Investor - XAU Preparing to Breakout as Gold Bugs Remain Frozen in Fear - (7/31/06)

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