Gold has made some good progress in the last three weeks, and not surprisingly, so has the Gold & Silver Mining Index (XAU). When we looked at the chart recently, we saw a number of features worth talking about.
We always like to look at longer-term charts as part of our analysis process, because they provide a broader context within which to interpret shorter-term moves. The first obvious feature is the head and shoulders pattern, which executed when price dropped below the neckline. At that point our minimum downside target would be equal to the distance between the top of the head and the neckline, which is somewhere south of the horizontal line drawn across the 2008 low. Note that there is a PMO (price momentum oscillator) negative divergence relative to the left shoulder and the head — a non-confirmation of the price high.
Price was very oversold because (1) it had drifted way below the declining tops line, and (2) the PMO was almost as negative as it was at the 2008 low, so a snapback rally was a reasonable expectation. The fact that the PMO has bottomed implies that the rally could go well beyond the declining tops line of resistance.
Finally, the Price Relative line provides an interesting lesson in relative strength, which is often misunderstood. Note that it has run flat over the last quarter, which means that the XAU strength is about the same as gold. Note as well that during most of that period the XAU fell pretty steeply, so gold and the XAU may have been of approximately equal strength, but they were still falling nevertheless.
The XAU is firming relative to gold, and the very oversold PMO bottom indicates that significant gains could be made before the rally ends; however, the head and shoulders downside target has not been realized, and there is significant overhead resistance to be overcome. There is no basis for assuming that the long-term outlook has turned positive, only less negative.
Carl Swenlin | president and founder of DecisionPoint.com