HUI Showing some Signs of Stability

The mining shares are attracting value-based buying which is providing some signs of stability in this beaten-down sector. As mentioned many times on this site, it will require far more than value-based buying to take this sector strongly higher. For that to occur, it requires momentum based traders.

Just take a look at the broader equity markets and you can see what happens when these momentum buyers decide to chase prices higher.

While we might have stem the downside in the mining shares, this sector needs to prove itself technically in order to give some potential buyers the confidence that this is just not a pause before a new leg lower.

For that to occur, buyers will have to show enough conviction to take the index into the gap region shown on the price chart. They will not only need to spike it into that gap, but hold it there on a close for a bare minimum. If they can do that, it should give some bears second thoughts about hanging around excessively long and overstaying some successful trades in the mining sector.

A CLOSE above the top of the gap, near the 300 level, should bring in some momentum based buyers as it will induce some additional short covering.

I want to continue to reiterate the necessity of these mining shares to improve their technical chart pattern before the gold market can sustain any sort of extended move higher. The shares led the metal lower and more than likely they will lead the turn in the metal higher. I would also suggest monitoring holdings in the ETF, GLD, to see if investors are returning to gold.

Moving over to gold itself, I am detailing a 2 hour chart as it establishes some areas of technical interest for us. After the wild volatility of last week, we are finally seeing some signs of a market that is settling down and beginning to act in a more "civilized" fashion. By that I mean it is not swinging all over the place.

Along that line, the Gold Volatility Index, has been dropping also. It is currently trading near 21.80 after having spiked as high as 35. That confirms that the recent bout of volatility (emotional duress) is behind us for the time being.

Back to the chart - what concerns me about gold is that the strong physical demand has been able to spook some bears (Goldman cancelled its sell recommendation) but has not yet been enough to bring back those investment types that were flooding into the gold ETFs around the world and the mining shares.

The other question I have is whether or not this physical demand is going to keep up its torrid pace if prices continue to drift higher. Gold under $1400 was certainly cheap but will buyers around the globe see it that way if it climbs back towards $1470 or higher? That remains unclear.

What I believe is the more likely outcome of this is that a floor has been established in the gold market below $1390 but there is not enough investor type demand from large players to drive the market sharply higher. The outcome then is most likely a period of range bound trading with both sides looking to either sell rallies or buy dips depending on their bias towards the market.

Right now, the top of the range is near $1440. Selling is entering near this level and bullish enthusiasm is fading as the market moves higher based on the shrinking volume. With volume low, bears feel confident selling against this level since they have some wiggle room to play with the $1450 psychological level as a mental stop out point. That is a relatively favorable trade in their minds since the risk is small compared to the potential for a drift back towards $1400 and perhaps lower.

Bulls on the other hand will more than likely feel comfortable buying in near those same levels figuring that physical demand will be their ally. They do need to take the price through $1440 very soon or they are going to face some desertion in their army from the shorter term oriented day traders and scalpers.

As far as today goes, the strong pop in crude oil that has taken it above the $90 mark, along with a bit of strength across the commodity sector, most notably copper, is giving gold a boost, especially with a bit of weakness being seen in the US Dollar.

It is going to be very interesting to see if the Asian demand that we have been seeing overnight continues this evening. It cannot let up if the market is going to hold its gains especially with equities continuing their one way trip north. Blue Horseshoe apparently still loves equities and until he stops loving them, a great deal of that $85 billion from the Fed this and every month, along with that $74 - $76 billion from the Bank of Japan, is going to end up in equities instead of gold.