XAU Lags And Drags

05/30/07 10:55:23 AM

by Arthur Hill

The Philadelphia Gold & Silver Index ($XAU) has been stuck in a rut the last 15 months, and relative weakness remains a serious drag. Here are the levels to watch.

Security: $XAU
Position: Hold

On the weekly chart (Figure 1), the index surged above 150 in February 2006 and then embarked on a long trading range. There was another surge above 170, but the index then met resistance at 150 no fewer than six times in the last 12 months. This is the level to beat, and a breakout triggering a major bullish signal.

FIGURE 1: XAU, WEEKLY. The index surged above 150 in February 2006 and then embarked on a long trading range.

Graphic provided by: MetaStock.

Two patterns are evolving, a triangle that extends back to September 2006 (blue lines) and a trading range that extends back to June 2006. The triangle shows that the trading range has actually narrowed over the last few months. As such, I would set key support at 125 and key resistance at 150. The direction of the next break will have long-term implications for this index and precious metals.

Figure 2 shows the performance of XAU relative to the GS Precious Metals Index ($GPX). The index outperformed from March 2005 to June 2006 and underperformed from July 2006 to May 2007. The price relative remains below the red trendline and XAU continues to underperform. In fact, the price relative broke to new lows in January and relative weakness in XAU remains a real drag on precious metals.

FIGURE 2: XAU, RELATIVE TO GOLDMAN SACHS PRECIOUS METALS INDEX. The index outperformed from March 2005 to June 2006 and underperformed from July 2006 to May 2007.

Graphic provided by: MetaStock.

In addition to an upside breakout at 150 in the index, I would also look for the price relative to break above 155. This would forge a trendline break and signal the start of an outperformance period. XAU does best when it leads gold and precious metals.

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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XAU Lags And Drags

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