Trader’s Narrative

Gold stocks (as measured by the Gold Bugs Index) have now closed down for eight consecutive trading days. This has taken the HUI from a high of 400 to striking distance of 300.

The good news is that the bullish sentiment that accompanied the recent highs in the gold index, has for the most part evaporated and been replaced with reticence. As measured by the Hulbert Gold Newsletter Sentiment Index, bullish gold sentiment has fallen from a high of 73.2% to 8.93%. Likewise, gold sentiment, as measured by Market Vane, shows a significant and sharp drop in bullishness. This is what you’d want to see if you’re looking for a bottom.

The technical picture also looks promising. Taking a look at the % above their moving averages, we find that there are zero above their 10 day moving average, 15% above their 50 day moving average (but appx. 90% remain above their long term 200 day moving average). This is supportive of an intermediate to short term bounce.

Turning to the k-ratio (approximated using HUI and price of gold), we see that it has fallen significantly. This tells us that gold stocks have fallen more than the commodity itself and are therefore more attractive than gold (relative to just a few weeks ago). The k-ratio is not as low as last April and May, but it is in an area of support.

Finally, to round out the positive outlook for a coming bounce in gold stocks, as I look at the individual charts, I see hammers everywhere. Most obvious, the HUI itself has put in two daily hammers back to back. If the high of the hammer is exceeded and the close is positive or if there is a positive engulfing pattern this week, that would be a very good confirmation signal.

The only negative I can find is that May and June in the seasonal chart for gold are not very favourable. The best time for gold, historically, has been September to October. But all this may mean is that if/when gold stocks do rise, they may not have the added boost of a rising gold price.