The Gold Bugs Index Hits Support

12/14/06 07:59:56 AM

by Arthur Hill

The December decline in the Amex Gold Bugs Index hit support and recent firmness could foreshadow a break higher.

Security: $HUI
Position: Hold

On the daily chart of the Amex Gold Bugs Index ($HUI ), the medium-term trend is clearly up (Figure 1). The index bottomed in early October and moved sharply higher over the next two months. HUI forged a higher low in mid-November and a higher high in early December. It is a clear and present uptrend.

FIGURE 1: GOLD BUGS INDEX, DAILY. Here, the medium-term trend is clearly up.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Despite this uptrend, HUI experienced some weakness in December. However, the decline looks relatively minor and support is close at hand. Broken resistance and the October trendline confirms this support level.

FIGURE 2: GOLD BUGS INDEX, INTRADAY. The last lower high formed around 351. A break above this level would signal an end to the December decline.

Graphic provided by: TC2000.com.

Graphic provided by: Telechart 2007.

Even though the big trend is up and the current decline looks like a correction, the current decline has yet to reverse and the moving average convergence/divergence (MACD) 5/35 is still moving lower (red line). I am using different moving averages to increase the sensitivity of MACD (five-day EMA less 35-day EMA). The white line is the five-day EMA of the MACD 5/35 and this acts as the signal line. A move above this signal line would reflect an upturn in the MACD and in HUI. I would take this as positive and call for an end to the correction.

Turning to an intraday chart (Figure 2), we can also focus on the December decline and pick a trend reversal point. A downtrend is made up of lower lows and lower highs. At the very last, a higher high is required to reverse this downtrend and start an uptrend. The last lower high formed around 351 on Monday. A break above this level would forge a higher high and signal an end to the December decline.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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