GOLD SHARES RISE, BUT ARE OVERBOUGHT AS ARE ENERGY SHARES -- THAT'S GIVING A BOOST TO THE REST OF THE MARKET
GOLD SHARES HAVE STRONG WEEK ... Among industry groups, gold stocks catapulted to the top spot last week. Chart 1 shows the Gold & Silver (XAU) Index breaking through a major down trendline and its 200-day moving average. A lot of that had to do with a weaker dollar. [I recently wrote that a weaker dollar would benefit gold and foreign ETFs which has been the case during August. Please see my earlier update on new Japanese leadership]. On a short-term basis, however, the XAU has reached overbought territory which is measured by an RSI reading over 70 (see blue arrows). That's the most overbought reading since the spring. Chart 2 shows the gold ETF (GLD) pulling back from chart resistance at its March high. A bounce in the dollar also caused some gold selling. My longer-range view for gold and gold stocks remains bullish.
Chart 1
Chart 2
OIL SHARES ARE OVERBOUGHT ... I've been bullish on oil shares for a long time and remain so. On a short-term basis, however, the energy group has come too far too fast and looks vulnerable to some profit-taking. The daily bars in Chart 3 show that the RSI line for the Energy Sector SPDR (XLE) is not only in overbought territory over 70, but is also showing some negative divergence from its June high. [A negative divergence exists when prices hit new highs while the RSI line shows declining peaks]. The fact that the XLE is so far above its 50-day average also suggests an over-extended group. Chart 3 shows a similar over-extended situation in the Oil Service Holders (OIH).
Chart 3
Chart 4
ADX LINE FOR OIH IS TURNING DOWN ... The black line at the bottom of Chart 4 is the Average Directional (ADX) Index line. As long as it's rising, the current uptrend is okay. When it starts to turn down, however, from the area around 40 (which it is now), that's usually a sign of a short-term peak. The green line is a measure of buying power (+DI) while the red line measures selling pressure (-DI). The green line crossed over the red line in late May which is bullish. The fact that the two lines are starting to converge is another caution sign. One final thing. Another sign of an over-extended market is present when the ADX line crosses over the +DI line and starts to turn down. The last time it did that was in March at the start of a two-month correction. Any hint of weakness in the oil patch could give a boost to the stock market which is testing some short-term support levels.
