Charted Territories

By Jim Donnelly, Olson Global Markets

On monthly charts, the Philadelphia Gold & Silver Index appears to be cascading toward a test of key trend line support at the 138 level after reaching a peak of 232.72 in December 2010. The Philadelphia Gold & Silver Index is a composite of sixteen (16) precious metals mining companies represented by the symbol “XAU”. And while the price of gold is off its peak price by 20.0%, the price of silver is down by a much larger 47.2% with the overall XAU index off by 39.4% from its all-time high.

From a technical point-of-view however, it is interesting to note that the last three times monthly RSI (the Relative Strength Index) reaching current levels, a solid reversal to the upside followed within a two month period. Of perhaps more interest is the observation that the last time monthly stochastic studies were this low, a multi-year outsized move to the upside also unfolded.

While it is clear, that the XAU is far from a testing key long-term trend line support drawn off the lows of the years 2000, 2008 and 2009, it does appear to be entering into a “buy zone” near the 138 level based on monthly RSI and stochastic studies. Rising fears of the value of “fiat currencies”, such as Yen, the Eurodollar and possibly the dollar itself, are often cited as the reason why silver and in particular gold are viewed as alternative global currencies.

Increasing restrictions of gold buying in some European countries last year, as well rumors this year that the Indian government may begin to limit the importation of gold due the affect it is having on its balance of trade may have contributed to the already-in-progress decline in precious metals mining stocks. Nevertheless, the extended downturn may be providing an interesting buying opportunity.

Key names to keep an eye on are: Agnico Eagle Mines, Ltd.; (AEM), Freeport McMoran Copper & Gold, Inc. (FCX); Goldcorp, Inc. (GG); Newmont Mining Corp (NEM); and Silver Standard Resources. Inc. (SSRI). Each is trading with either a similar pattern to the XAU, or hitting its long-term trend line support.

One caveat to this “buy on weakness” point-of-view is however, that if the 138 area fails to hold as support, a solid “leg” lower could unfold and along with it bring out the drumbeat of the “D” word (deflation). For now however, RSI and stochastic studies suggest a buying opportunity on precious metals mining stocks may soon be coming.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Oil service stocks tend to be highly sensitive to the level and direction of energy prices in general, and to the price of oil in particular since their function is to explore and extract liquid petroleum largely for domestic consumption. As a result, they also tend to be a reflection of the underlying strength and direction of domestic economic growth since the demand for energy products typically rises as economic activity increases.  That is why the weekly chart of the PHLX Oil Services Sector Index (OSX) is of some importance.

After testing and rebounding off key long-term “cross” trend line support at 184.48, the OSX has continued to edge higher in a slow, but deliberate fashion. This support line, which would have actually been considered to be long-term trend line support dating back to 2001, is instead referred to as “cross” trend line support” due to the 2008/2009 liquidation phase which caused the OSX to temporarily break below it. That liquidation phase sent most commodity prices (as well as equity prices) sharply lower in a plunge that was triggered by the Lehman Brothers failure and the unwinding of its highly levered commodity positions.

In any event, the OSX rebound off the 184.48 level at the close of June is important since oversold conditions were present. Despite some doubt that energy prices would find a footing, the weekly chart of the OSX suggests that it already has. Moreover, if economic activity continues to show signs of growth, the upside potential for the Oil Service Sector is impressive, since key downtrend resistance and another important “cross” trend line intersect at the 269 level in a few months or so from now.

Key stocks to follow are: Lufkin Industries (LUFK), Diamond Offshore (DO), Baker Hughes (BHI), Weatherford International (WFT), Transocean, Ltd. (RIG) and Nabors Industries Ltd (NBR). The weekly charts of each of these companies are either at key support levels, or are in technical patterns that suggest they are about to “breakout” to the upside. Other names such as Halliburton Company (HAL) and Noble Corporation (NE) are at or near key support levels as well. In summary, if the upside reversal in the OSX continues to play out, it might be very helpful in lifting the S&P 500 Index to higher levels too.

http://www.ogmarkets.com/