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Gold Rush at Trader’s Narrative

Gold Rush

The AMEX gold bugs index has bounced back, finding support at the 280 level exactly where it did so before in March 2006. This caught me off guard since I was bearish on the sector. But there’s been a concomitant rise in bullish sentiment which does not bode well for the gold sector; atleast in the short term.

According to Mark Hulbert, the sentiment picture has changed too quickly for this bounce to have any more legs. His Hulbert Gold Newsletter Sentiment Index - a calculation of the average recommended exposure in the sector by gold timing newsletters - shows a jump of more than 70 percentage points in only nine trading sessions. This is the biggest nine day jump in many years.

With such a rush to get back into gold just as it has bounced off intermediate support, things don’t look that good. Bulls should ideally see a skepticism if this rally is to have any endurance.

As well, the k-ratio has increased to levels where gold stocks have hit resistance in the past. Here’s an explanation of the k-ratio, in case you’re not familiar with it.

One of the reasons why I was bearish on the sector was breadth. At that time, the % of gold stocks above their long term moving average was still quite high. But immediately after I wrote that, that percentage fell very quickly from 75% to 20%. This breadth washout was so rapid it took me by surprise. So it was understandable that with such a dramatic deterioration in breadth and with gold itself kissing its 200 day moving average we would see a swing bottom in the middle of June.

But similar to the sentiment picture, this metric has turned around just as quickly as it fell. Now just a few trading days after, we again see the breadth showing 100% of stocks above their 200 moving average. The probability of a rally continuing with such an overstretched breadth is extremely low.

In fact, the probability is that we’ll see either a pause here or a retrace. If HUI does fall from these levels, it could carve out an almost perfect head and shoulders with the 280 level being the neckline:

HUI head and shoulder.png

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One Response to “Gold Rush”  

  1. 1 Bearish on Gold Stocks: HUI and Gold Futures

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