GOLD STOCKS ARE UP AGAINST LONG-TERM RESISTANCE -- USING THE PARABOLIC SAR ON GLD -- DISTINBUISHING BETWEEN CORE AND TRADING POSITIONS
XAU INDEX REACHES MAJOR RESISTANCE ... Earlier in the week I showed a chart of Newmont Mining trading over its 1996 high at 60. [It's since dipped back below that level]. Chart 1 shows a long-term chart of the Gold & Silver (XAU) Index. And therein lies a short-term caution signal. The XAU has moved right up against its 1996 and 1987 peaks near 155. Given the size of its recent climb, and the proximity to two formidable resistance barriers going back nearly twenty years, I have to warn that this would be a logical spot for precious metal stocks to encounter some selling. If they do start to pullback, bullion will probably do the same. That's another reason to hold off any new purchases in this overbought sector at the current time. Short-term traders might even want to take some partial profits. But I'd hold onto core positions. This is the same advice I gave a couple of weeks ago for the Gold Trust Shares (GLD) -- although they've since rallied to new highs. I also suggested at the time that an alternate strategy would be use a trailing stop to protect against any sudden downturns. That's still a good idea either for GLD or gold stocks.
Chart 1
USING A PARABOLIC SAR TRAILING STOP ... Back on January 19 I wrote an article showing how to use the Parabolic Stop and Reversal (SAR) to protect against short-term downturns in the GLD (January 19, 2006). I won't repeat the entire analysis here, but will give an update on the current situation. The daily bars in Chart 2 show the recent uptrend in the streetTracks Gold Trust Shares. The rising dots below the price bars have shown an uptrend since the end of December. Prices must hit last dot to trigger a short-term profit-taking signal. As of today, the last SAR dot is at 56.08. If that price is hit (and especially if it closes below that level) some short-term profit-taking is justified. Short-selling, however, is not justified. That's because the major trend is still up. And because the weekly SAR is still up as well. Chart 3 shows that prices would have to fall to 51.92 to trigger a more substantial sell signal. So all we're talking about here is a potential "short-term" profit-taking signal. Since the trend is up we avoid short sales. And we still hold onto our core gold holdings.
Chart 2
Chart 3
DISTINGUISHING BETWEEN CORE AND TRADING POSITIONS... I've always preferred dividing positions into a long-term core holding and a short-term trading portion. The core holding could be anywhere from half to three-quarters of the total position. That should be held for as long as the major uptrend is still intact. That leaves a quarter to a third for shorter-term trading purposes. It's that smaller portion that I'm referring to here as a candidate for some potential profit-taking. Newer investors who have no gold positions are probably better off waiting for a price pullback closer to the 50-day moving average, or a period of consolidation, to make any new purchases. The odds for a gold pullback are also increased by the U.S. Dollar Index continuing to bounce off its 200-day moving average.
