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GOLD/GOLD STOCKS

In our report for the Gold Mining Stock Indices on 2-10-05, we opined that the XAU could end up in the 121-123 zone, which is apparently what took place. Now it is a good time to re-assess the action in gold and gold stocks and see if any new conclusions can be drawn.

The metal has not violated channel support, and it remains by definition in an intermediate bullish mode. It is about to challenge short-term resistance at 568-571, and if it is successful in its attempt, it can rally theoretically all the way up to the top of the channel at 630. The current action ought to be interpreted as  potentially short-term BULLISH (see chart above).

The HUI has broken above the declining tops-line which has defined short-term resistance, and unless the break-out was fake, it looks poised to challenge the next resistance level at 325. The current action ought to be interpreted as potentially short-term BULLISH (see chart above).

The XAU has not violated channel support on a weekly basis, and considering that support has been tested for the past three weeks the current action ought to be interpreted as potentially short-term BULLISH (see chart above).

The XAU found support at the 121.76 level which represents both channel support and a .618 Fibonacci retracement level. Subsequently, it rallied and it has broken above the declining tops-line which has defined short-term resistance, and unless the break-out was fake, it looks poised to challenge the next resistance level at 135.07. The current action ought to be interpreted as  potentially short-term BULLISH (see chart below).

Notice that if the XAU is successful in negotiating with resistance at 135.07. The next upside targets will be 139.15 and 143.24 (see chart above).

Notice that the gold/XAU ratio is near the middle of its range and thus, the current ratio ought to be interpreted as short-term NEUTRAL (see chart above).

The SI25 is rising, which is supportive of higher prices, at least on a short term basis, and thus, the current reading ought to be interpreted as short-term BULLISH (see chart above).

The Momentum SI is rising but it is still below the zero line, which means the current reading ought to be interpreted as short-term NEUTRAL (see chart above).

The Thrust Oscillator is attempting to reverse to the upside, but we still don't have a positive cross-over yet, which means the current reading ought to be interpreted as short-term NEUTRAL (see chart above).

The BSE Index is declining, but it is at the zero line and we have a noticeable positive divergence on balance which means the current reading ought to be interpreted as short-term NEUTRAL (see chart above).

The V.T.O. is rising, and it has not yet gotten close to its respective resistance levels, thus the current reading ought to be interpreted as short-term BULLISH (see chart above).

The trend is NEUTRAL (see chart above).

CONCLUSION

Price has met its downside target and subsequently it has rallied above the declining tops line that defined the upper end of the declining channel. At the same time, most indicators are giving either neutral or bullish readings. Consequently, we have concluded that in all likelihood the three most likely scenarios going forward are the following:

1. The bullion will break above resistance and rally to 630. In that case it will pull the XAU along to new marginal highs. If the bullion closes above 590, and the XAU can close above 144 over the next 5-10 trading days, then the odds will be better than even in favor of scenario #1, and we ought to expect the XAU to test resistance in the 150-160 zone (see chart below).

2. The bullion may make marginal new highs, but the XAU, after overcoming resistance at 135.07, will fail to follow through with a close above 140. In that case the odds will be better than even in favor of scenario #2, and we ought to expect the XAU to resume its decline and to test support in the 119-117 zone (see chart below).

3. Finally, the bullion will fail to make new highs, or it may make a marginal new high, and the XAU will fail to overcome resistance at 135.07. In that case, the odds will be better than even in favor of scenario #3, and we ought to expect the XAU to resume its decline and to test support in the 115-112 zone (see chart below).

Based upon our conclusions, we are expecting a rally in the XAU at least up to the 135 level, and therefore, we are currently on a short-term "BUY" signal. In our managed accounts which are focused exclusively on Precious Metals we took positions on Thursday and Friday of last week, committing 30% of our capital to the long side with sell stops below Friday's lows. The picture below shows the current holdings (per 100k of starting capital) in the accounts under the program.

Ike Iossif

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