Monday, August 12, 2013

An XAU turnaround?

The last few days have been good ones for gold but even more so for the gold and silver mining stocks.  The mining sector was helped by a weak U.S. dollar, which fell for five straight days last week. 

Let’s have a look at the gold/silver mining stock group via the XAU index.  With the XAU index I’m not going to evaluate the interim trend by looking at any trend lines or moving averages, which can sometimes cloud the issue.  While I do believe certain moving averages are important, especially for the immediate-term trend, I also believe there’s a danger of attaching too much significance to moving averages.  Traders sometimes fall victim to the trap of attributing almost mystical powers to certain moving averages, and this can be a dangerous error.  When evaluating the main interim trend of the XAU it’s often best to just look at the “naked” chart without any technical adornments such as moving averages.

With that proviso, let’s examine the year-to-date chart of the XAU index.  As you can see, each and every rally attempt so far this year has met with failure; the turnaround attempts as far back as January were reversed into lower lows, which amounted to a continuous downtrend. 

By definition a reversal of the trend requires the market to break this chain of lower highs and lower lows by establishing a final low.  In other words, the market has to succeed in making an initial higher low and higher high, which in turn becomes the first step in a new upward trend.  As we’ve seen already, days like today where the XAU has rallied have normally failed to reverse the downtrend.  But one thing that has already distinguished the XAU’s chart pattern over the last few weeks is that the index is in the process of establishing a higher low. 

If the XAU succeeds in following through in the coming days by pushing above the nearest high of 103 on a closing basis (the July 23 closing high) then we’ll have our first confirmed instance this year of a higher low and a higher high.  In other words, we’ll have the beginnings of a genuine turnaround as opposed to another “dead-cat bounce.”