Internal Momentum Indications
for the Gold Stock Sector
by Clif Droke. March 20, 2006
The XAU gold/silver index was basically unchanged after Friday's (Mar. 17) trading session, closing the day at 131.74. This gave the XAU a slight gain for the week, however, coming off that oversold extreme from the previous week.
The Amex Gold Bugs Index (HUI) meanwhile closed the latest week at 302.43, slightly below its 15-day trend line and also slightly below the important 60-day moving average. Although HUI has so far managed to find support above its dominant interim 90-day moving average it is still struggling with the resistance at the 60-day MA and thus isn't completely out of the danger zone yet.
In our previous look at the gold stock sector, we looked at all the oversold indications that were flashing in the oscillators and internal indicators. In this commentary we'll look at how much the indicators have changed in the past few days of rally and whether there might be more rally potential in the immediate-term, or whether more time will be required to repair the damage done to the sector since the February sell-off.
Last time we talked about the gold stock sector's 50-day MA indicator. This is simply a measure of how many gold stocks in our list of 50 are below the 50-day moving average as of Friday's close. Last Friday (March 10) there were 27 out of 50 gold stocks below the 50-day MA. On Friday, March 17, that number was 25, not much different and still reflecting an "oversold" market condition. The last time the 50-day MA indicator reading was this high (i.e., oversold) was Oct. 21, 2005. This was near the XAU's previous interim low back in late October. But back then the XAU remained in an oversold condition for another couple of weeks before it finally reversed. If this is any indication the XAU will take some more time before attempting to reverse, and the chart suggests more time is definitely needed before a sustained rally gets underway. Notice the large increase in the number of stocks below the 50-day MA in the last couple of weeks in the chart below.
Next there is the 15-day MA indicator, which is updated daily. This is a simple measure of how many gold stocks are below their 15-day moving averages. I consider the 15-day MA to be one of the dominant immediate-term trend/momentum lines for most actively traded gold shares. Whenever the number of gold stocks below the 15-day MA exceeds 15 for more than a couple of days it shows that selling pressure is increasing. Out of the 50 actively traded gold stocks on my list, there are still too many below their 15-day MA as of Friday (Mar. 17). Although the number of stocks still below the 15-day has been shrinking since reaching almost 40 last week, there were still 20 gold stocks below the 15-day MA as of Friday's close. That's still too many and it shows that selling pressure hasn't completely lifted from the sector yet.
Next there is the matter of internal momentum. This is measured by our series of HILMO indicators, which measure the rate of change in the net number of stocks making new highs. HILMO measures the incremental demand for gold stocks better than price itself. The chart showing 5-day, 10-day and 20-day rate new high/new low momentum has been trying to reverse its rate of change for the last couple of weeks from the decline that has been underway since early February.
The 10-day HILMO indicator is still in negative territory and 5-day and 20-day HILMO haven't turned up yet in sustained fashion. Since the rate of change in the new highs hasn't reversed upward yet it is to early to call a confirmed bottom to the gold stock correction. Until HILMO reverses there could still be a re-test of the March lows in the XAU or possibly even a lower low. We'll continue to watch HILMO for a confirmation signal that the correction is over.
© 2006 Clif Droke