Gold took a hit today, falling as much as $40 an ounce primarily on a knee-jerk reaction to the first rate hike in China in 3 years. A violent move such as that does not scare us in the least. In fact if you look at the bull market in Gold over the last decade, the biggest single-day moves have consistently been to the downside. Today was another healthy shakeout and savvy investors will keep focused on the big picture and embrace any further weakness which is expected to be limited.
Tonight, BMR’s Technical Analyst takes a fresh look at the TSX Gold Index which fell in sympathy with the yellow metal today and closed at 389, just below its 50-day SMA and only 11 points above its 100-day SMA. Strange thing is, the TSX Gold Index is now back to where it was 5 weeks ago (Sept. 14) when Gold was trading about $70 lower around $1265, and nearly 4 months ago when the yellow metal was at $1,250. This clearly demonstrates we’re far from a top or a “bubble” in Gold mining stocks. In fact, the party has hardly begun.
Could there be a little more weakness ahead? Absolutely, as John points out below, but the downside from here with the TSX Gold Index is limited (the action in the CDNX also confirms that):
John: Tonight we look at the S&P TSX Global Gold Index in Part 3 of our 4-part series on indexes and the Gold Sector. The TSX Gold Index is a modified market capitalization index of 19 precious metals mining companies with a minimum market capitalization of $240 million (U.S.). No individual component has a weight in the index greater than or equal to 25%.
Looking at the weekly chart of the TSX Gold Index, we see that it rose from a low of 300 in February of this year to a high of 390 in June before it retraced for 5 weeks to the 345 level. It has risen again to a new all-time high of 410 during October. Today we saw it take a hit with the drop in Gold, and the TSX Gold Index closed down 13 points to 389 – its first close below 400 in 10 sessions.
Today’s close is right on a support level as shown by a short horizontal green line which is at the pivot level of the previous high in June. I have also drawn a strong support level (lower green line) at 380, just above the rising 100-day SMA. The index closed near its session low today, so there is still some downward pressure.
A mauve circle highlights 4 “spinning top” candles. A spinning top candle has a small body and usually has both upper and lower shadows and denotes indecision. When the shadows are very long they indicate confusion between the bulls and the bears. The 4 spinning tops show there has been a lot of indecision in this index over the past 4 weeks and this came to a head today when the bears overcame the bulls and took the index to the downside.
The long term weekly SMA(50) provides very strong support at 356 as it did in July. The weekly volume has been declining for the past 4 weeks, also indicating the possibility of a correction.
Looking at the the indicators:
The RSI has plunged out of the slightly overbought area down to the 51% level. I have drawn a previous support level at 40% (thin orange line) and it could continue down to this support, but I do not expect this support to be broken.
The Slow Stochastics is still overbought with both the %K and %D lines above 80%.
The ADX trend indicator has the +DI (green line) above the -DI (red line) in bullish orientation, but the bullish +DI peaked in the 3rd week of August (vertical blue line) and has declined from there even though the index has still climbed. In retrospect this was a warning there could be weakness ahead. The ADX (black line) trend strength indicator is at 23 and has flattened, indicating there could be trend weakness during this correction.
The primary trend for the TSX Gold Index is still very bullish.
Outlook: I expect we’ll see some additional weakness in the immediate future but support should hold at the 380 level. I will be surprised if it falls further before continuing its climb past 400.
