Gold stocks now oversold on breadth but low lies ahead

25 February

On 28 January, I showed how the components of the Philadelphia Gold & Silver Index (XAU) were nearing oversold on breadth, measured by the % of stocks above their 200 day moving average.

Last week, this %age fell to zero, matching occurrences in 2000, 2008 and 2012.

Philadelphia Gold & Silver Index (XAU) and % above 200 day moving average

In these three years, price lows for XAU were formed with oversold breadth but not immediately on reaching oversold.

With breadth having only just reached oversold, the table suggests that we should expect to wait at least five weeks for a price low.

That doesn’t rule out gold stocks starting to perform better on a relative basis, if the rest of the market is falling. Last week I showed the possibility for Newmont Mining (NEM) to start outperforming.

Newmont Mining (NEM) vs S&P500 Index

There still just about has a bullish divergence against the April 2012 low, but the set up on the daily chart has been blown by a move of the RSI back below 30. I’ll continue to look for a good set up on gold stocks on price and relative strength to coincide with the breadth low but the table above suggests there is no hurry.

I showed one such example on last April involving Agnico Eagle Mines (AEM). On 28 May, I closed the trade, making a 25.3% profit. You can see a record of my trades on the About me page.