GOLD BEGINS DOWNSIDE CORRECTION AFTER GOLD STOCKS STALL AT MAJOR RESISTANCE

XAU PULLS BACK FROM OLD HIGHS... Last Friday I issued a short-term warning on gold and gold stocks based primarily on Chart 1 which showed the Gold & Silver (XAU) Index up against major overhead resistance at its 1996 and 1987 highs near 155 (February 03, 2006). I suggested that this would be a logical spot to see some short-term profit-taking in gold stocks and gold along with them. We're finally seeing that today. Bullion is falling $15 and gold stocks are the day's weakest group with losses of more than 5%. That's also hurting the basic materials group as commodity stocks in general are encountering new selling. Energy stocks are being sold heavily today on sharply lower energy prices. Chart 2 gives a closer view of the XAU Index. Short-term indicators have turned negative with the 9-day RSI line falling below 50 and daily MACD lines on a short-term sell signal. I expect the XAU to test the 50-day moving average before long.

Chart 1

Chart 2

BULLION GIVES FIRST SAR SELL SIGNAL IN 2006... The daily bars of the StreetTracks Gold Trust Shares (GLD) are also on a short-term sell signal. Today marks the first time since late December that a Parabolic SAR sell stop has been hit. That justifies some short-term profit-taking. [The GLD has also broken its 20-day moving average, which isn't shown here, for the first time in 2006]. Volume is picking up on the selling which is a negative sign. And the daily MACD histogram has turned negative. Here again, a drop to the 50-day average appears likely. As I also suggested last Friday, it's okay to sell a portion of your gold holdings (25% to 33%). But I'd hold onto the rest. While the major trend of energy shares is still higher, some short-term profits might be justified there as well. MORE LATER.

Chart 3