Gold & Gold Stocks:
A Healthy Pullback on a Bullish Playing Field

Contributed by Olaf Sztaba
NA-Marketletter
www.na-marketletter.com
Mar 9, 2007

GOLD

(Daily chart with the 50- and 200-day moving averages)

GOLD: The Gold market started February in a "wait and see" mode. The major 640-660 resistance area continued to limit any advances. In addition, a sharp decline in the first days of February spooked market participants and tempered their expectations. Our stand was clear: "Up and Away" with a possibility of a pullback toward the 640-660 area (resistance becomes support). Within a few days, the price of gold exploded to the upside and lifted above 660; so did the excitement. The Hulbert Gold Sentiment Index jumped to plus 75% (the range extends from minus 31.3% to plus 89.6%), an excessive figure especially at the outset of a major rally. This sudden surge of bullishness had to be corrected for this rally to have any future.

An anticipated correction in the general market ("A correction is urgently needed" - February 1, 2007) came as a trigger and the sell-off wave swept through Gold and Gold stocks. The latest sentiment readings show that the decline, indeed, tempered investors' enthusiasm toward Gold (57% vs. 75%). But is it enough to get Gold back on its bullish tracks? Technically, the current pullback toward $630 has met its objective and an additional backing-and-filling should finish the job within this month.

After a breakout above the major $640-$660 resistance area and the subsequent rally, Gold gave way to a pullback. This occurred last week with a sharp decline toward $640 and toward its 200-day moving average.

This move does not damage the bullish case. We think the bears will continue to be disappointed, especially when the current pullback runs its course.

HUI

(Weekly chart with the 40-week moving average)

GOLD STOCKS: In early February we described the HUI index as "technically immobilized" within a one-year consolidation pattern. During the recent rally, once again, the index was not able to overcome the resistance at 360 and the upper extreme of its trading range. As a result, Gold stocks sold off and pulled down the HUI index toward the lower line of the consolidation pattern (please see chart).

Despite the neutral behaviour of the HUI index, numerous individual stocks have already had powerful breakouts. In January we reviewed seven stocks ("Metals - technical all stars") and since then five of them have already broken out from their multi-year consolidation patterns and moved decisively higher. Now, along with the gold sector, they are pulling back toward their respective breakout points.

Last year every pullback toward the lower, massive support line of the consolidation pattern was followed by a rally. Therefore the current weakness - especially in recently strong stocks - should be viewed as a buying opportunity.

Written on Mar 2, 2007
Contributed by Olaf Sztaba
Email: osztaba@na-marketletter.com
Website: www.na-marketletter.com

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