Golds (HUI): On the Verge of a Breakout

Contributed by Olaf Sztaba
NA-Marketletter
www.na-marketletter.com
Apr 24, 2007

(Weekly chart with the 40-week moving average)

For the last year the HUI index has been "technically immobilized" in a lengthy consolidation pattern roughly between 280 and 360. The failure of February's rally to penetrate the upper boundary of this range resulted in a sharp sell-off, which provided an excellent buying opportunity (Update: Gold & Gold stocks: "A healthy pullback on a bullish playing field", March 5, 2007). Recently, the HUI index had a rally to its key resistance and reached the 368 level.

Technical and cyclical evidence suggests that the HUI index is on the verge of a major breakout from its consolidation pattern. Here are the reasons:

• Cycles point to late June/early July as the next top for the market and the Gold sector before a larger correction starts,
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• Gold and Gold stocks are usually strongest toward the tail end of a bull market,
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• Long- and intermediate-term moving averages continue to point upwards,
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• The HUI index has outperformed the price of Gold in the last few weeks, which is usually a bullish sign,
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• Numerous Gold stocks have already had multi-year breakouts (ELD, GBG, GSC, HL, MFL, RNG, KGI, and ITF, to name just a few),
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• Professional money managers still avoid Gold and Gold stocks at large,
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• Bullish sentiment is not yet at extreme levels,
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• Bad news has been handled well by Gold and the Gold sector.

Historically, breakouts of this nature are accompanied by increased volatility around the breakout point. The market's "indecision" is usually short-lived and gives way to a resolute move to the upside. Therefore, we view the recent pullback as part of a bullish picture overall.

A breakout from an extended consolidation pattern is usually a very confusing and nerve-wracking process as investors show a marked degree of caution. Therefore, focus on stocks that have already overcome their key resistance zones and reached new 52-week highs.

Written on Apr 23, 2007
Contributed by Olaf Sztaba
Email: osztaba@na-marketletter.com
Website: www.na-marketletter.com

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