The Philadelphia Gold & Silver Index: Technical Tuesdays With Mark Bail: All That Glitters
Dec 20th, 2005 | By Penny Sleuth Contributor | Category: Commodities, Investing Strategies, MacroeconomicsMark Bail looks at the technical condition of The Philadelphia Gold & Silver Index.
Hello again, Sleuths,
In my last Technical Tuesday missive, I waxed rhapsodically about the glittering profit potential for the precious yellow metal in the upcoming year. Well, no sooner did I finish penning my column that the Philadelphia Gold and Stock Exchange broke out — that very day! Boy, somebody up there likes me!
OK, I’m done patting myself on the back. Actually, since my prediction was for 2006, the stunning spurt skyward two weeks back really doesn’t count — or does it?
Actually, it does count — but not for my giving myself credit as an all-knowing seer. I could get a broken arm from all that patting on the back I’m doing. Nah, self-congratulations are not important.
What is important is what that move portends for the future. That’s because understanding what that move represents can help you make money. And that’s really what counts, isn’t it?
Now, I promised two weeks ago that today’s column would be devoted to taking a look at the current technical condition of the Philadelphia Gold & Silver Index (XAU:AMEX). Are you ready? Great, let’s go!
The Philadelphia Gold & Silver Index: A Potentially Glowing 2006
If you will recall, in my last “Technical Tuesday” column, I said that when the XAU took out the January 2004 high last Sept. 29 — we had our first indication that the index’s 21-month trading range was coming to an end. Then, on Nov. 17 — when the XAU blasted through its late September high after a seven-week pause — we had confirmation of a dynamic, new uptrend, and the stage was set for a potentially glowing 2006 in the precious metals sector.
When I wrote those comments, after the market close on Dec. 5, the XAU sat at 116.43. The very next day, the index took off — bolting 3.26 points, a one-day 2.8% jump. Over the next week, the index continued to climb impressively — attaining a height of 126.99 on Dec. 12. All told, from its preconfirmation breakout close on Nov. 15 to its Dec. 12 intraday high, the index soared 17.7%.
That huge move up pushed the XAU into overbought territory. At its closing high of 124.18 on Dec. 8, the Slow Stochastics’ %K line sat at 92.67 — an extreme overbought reading. The following day, the %K line crossed under the %D line, indicating potential weakness.
Then, on Dec. 12, the index reversed to the downside, pushing the %K line below 80, and flashing a classic Stochastics sell signal. (Editor’s Note: My references to daily Slow Stochastics readings are based on using daily inputs of 14 for %K and 3 for %D. For a review of Stochastics trading signals, please see the Nov. 22 Penny Sleuth.)
The Slow Stochastics sell signal worked like a charm. Within two days, the XAU had plunged to an intraday low of 119.65 — a decline of 5.8%. That drop closed the gap formed by the jump on Dec. 7, and brought the index down to its first minor support level, around 120.
At the same time, the dramatic two-day decline worked off the index’s overbought condition, with the %K and %D lines falling to 59.55 and 69.36, respectively. Now, despite yesterday’s 1.16-point decline, the %K line just crossed back above the %D line, suggesting that short-term Momentum is turning up.
During the XAU’s recent price spike, the Relative Strength Index also alerted astute technical traders and investors of the potential for a pullback. On Dec. 8, the RSI — using a nine-day period — registered a closing reading of 71.4. As you will recall from my Oct. 11 column, a reading above 70 is considered overbought. Now, following last week’s retrenchment, the RSI sits at a bullish — but more modest — 55.9.
The Philadelphia Gold & Silver Index: The MACD
The Moving Average Convergence/Divergence — commonly known as the MACD — is a technical tool that depicts the Trend of a market average or stock. The MACD typically reacts more slowly to daily price changes than either the Stochastics or Relative Strength Index. Therefore, it can often provide a clearer picture of the direction of an index or stock than either of the other two indicators.
The XAU’s MACD is currently bearish. However, the reading is only slightly negative and is a result of last week’s reversal. The MACD had turned bullish on Nov. 9 and — except for one day in early December — and continued to signal a positive trend until last Thursday. The MACD’s current bearish signal suggests that the XAU could move sideways to slightly lower for a short time as the index further consolidates its recent impressive gains.
Two other technical indicators give me reason to suspect that the XAU may spend a little more time catching its breath before it turns back up. The first is the index’s Bollinger Bands. Bollinger Bands are trading bands that are located above and below an index or stock. However, Bollinger Bands reflect the volatility — or range–– of an index or stock by continually adjusting to the current volatility — or trading range — of that index or stock. An index or stock typically trades within the two bands.
I’ll devote a Technical Tuesday column in early 2006 to an exposition of Bollinger Bands. For now, however, suffice it to say that when an index or stock trades outside its Bollinger Bands, it becomes overextended and susceptible to a move opposite to the direction from which it just traveled.
On both Dec. 9 and 12, the XAU pierced its upper Bollinger Band — only to close lower, back within the bands. That was a bearish signal, and accurately tipped off the alert technician to an imminent short-term reversal. Yesterday, the XAU traded right back up to its upper band before closing lower.
Following a move back below its upper Bollinger Band, an average or security will sometimes trade all the way down to its lower band. The XAU has not traded near its lower Bollinger Band since mid-October, so a move there is overdue. Therefore, it would not be surprising to see the index back and fill awhile as the lower band adjusts higher.
The other reason to suspect that the XAU may pause a little longer is the index’s position relative to its 50-day moving average. As I mentioned in the last “Technical Tuesday,” over the past several months the 50-day moving average has provided important support to the index. In fact, since decisively breaking above its 50-day moving average back on June 10 — when the index closed at 88.54 — that key intermediate average has acted as the XAU’s primary level of support.
Now, I’m not suggesting that the XAU will suddenly fall back to its 50-day average — which currently resides at 112.84. The index has probably been too strong recently for that scenario to play out. Besides, the index’s recent price strength will cause the 50-day moving average to continue to rise.
However, as of the close of trading on Monday, Dec. 19, the XAU sits at 121.20. That puts the index 7.4% above its 50-day moving average. Since the XAU decisively broke above its 50-day average in June, the index has generally not strayed too far from its key intermediate line.
However, on the two prior occasions in the last half year when the XAU climbed significantly above its 50-day average — at the end of September and in late November — the index subsequently pulled back. I think it is likely that we will see a similar narrowing of the spread between the index’s price level and the moving average.
In the last Technical Tuesday, I set out what I considered to be the XAU’s primary support levels and potential upside target areas. I called primary near-term support to be in the 113-115 area, with potential resistance around 130-132. I believe those support and resistance levels continue to be valid.
The Philadelphia Gold & Silver Index: Watch December 12
The only additional intermediate resistance level to watch would be the Dec. 12 intraday high of 126.99. If the index can close above 127, it should lead to a quick challenge of the 130-132 area. If you would like to review the discussion of the index’s support and resistance levels and the technical reasons why I cited those specific areas, please take a look back at my Dec. 6 column.
As I stated earlier, I think it is quite possible that the XAU could trade sideways — or move slightly lower — over the next few weeks as it completes digesting its earlier fall gains. The initial downside area to watch is around 120 — the level at which the index arrested its decline last week. However, whether the XAU slides from here or not, the long-term technical picture points to a glittering 2006 for the index.
Two weeks ago, I listed several ways you could tap into the potential of gold and precious metals to nail down profits in the coming year. Whether you decide to use one of the Agora Financial newsletters to pan for gold over the next 12 months or strike out on your own, I thought it would be useful to conclude our two-part discussion of the XAU by providing you with a list of the 12 components that make up this shining average. Here they are:
Agnico-Eagle Mines (AEM:NYSE)
AngloGold Ashanti (AU:NYSE)
Barrick Gold Corp. (ABX:NYSE)
Freeport McMoRan Copper & Gold (FCX:NYSE)
Glamis Gold (GLG:NYSE)
Goldcorp Inc. (GG:NYSE)
Gold Fields Ltd. (GFI:NYSE)
Harmony Gold Mining Co. (HMY:NYSE)
Meridian Gold Inc. (MDG:NYSE)
Newmont Mining Corp. (NEM:NYSE)
Pan American Silver Corp. (PAAS:NASDAQ)
Placer Dome Inc. (PDG:NYSE).
Whatever route you take, I think you will find the yellow brick road a profitable one to travel on the next 12 months. All technical signs point to 2006 proving the statement “all that glitters is gold” to be an investment truism.
If you want to find out my overall outlook for the coming year, tune in to my next “Technical Tuesday” column. At that time, I’ll share with you some of the points I mentioned in my Webinar interview late last month. However, if you are an Agora Financial Reserve member, you will be able to catch my predictions — along with those of 10 of my colleagues — before I next touch base with you Sleuthers, on Jan. 3.
Until we meet again, best wishes for a happy and healthy holiday — and a gold-plated new year.
Trade well,
Mark Bail
December 20, 2005
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