Sometimes the scariest markets to deal with are the markets that keep going up, day after day, week after week. “Surely, this market has gone up too much. Surely, I am making too much money. This is too good to be true. One of these days this market is going to turn down and I will give back these great profits. Maybe I’d better sell now, nail down the gains and be happy with what I’ve made.”

Who among us hasn’t had that thought in their mind at least once or twice in their market career? It’s human nature and often not unfounded as markets that trend in one direction are relatively anomalous.

Yet, as I write this update, the only news to report is that the gold and gold stocks are headed higher – period. There are no “ifs, ands or buts” about it.

What has been happening over the last few days is a classic consolidation, the exact type of pattern you would want to see after the powerful rally that was seen in the Gold Stocks between August 30^th and September 19^th. Over that period of time, the XAU rallied from 92.68 to 113.26 (22.20%). We highlighted that rally at the bottom and as prices began to turn higher in Can You Hear The Train Leaving the Station?

OK – I know what you’re thinking.

You’re thinking “WHY?” shouldn’t I consider nailing down my gains and be happy with the current very handsome 15%? Why Not? Why should we stay long this gold market ? The answer is that this market is giving no sign, not even a hint, that it is close to a completed rally high. In fact, in this update I’m putting on the table five, count ‘em, five solid technical reasons that the intermediate term uptrend in gold stocks has significantly further to go.

Reason #1: Above 200-Day Upper Bollinger Band

First off, we look at the chart today of the XAU and its 200-day upper Bollinger Band. The XAU is currently in upside continuation mode outside its upper 200-day trading band. That’s right. With today’s close of 112.24, the XAU is 6.52 index points above the 200-day upper band, which ended at 105.72 (See arrow indicating today’s close in chart below.)

XAU Index & 200-Day Bollinger Bands: 2-Year Chart

Ordinarily, serious market peaks will take place with the XAU “INSIDE” the bands. Don’t believe me? Let’s look back at some prior market highs.

In the chart below, we see the XAU back in 1996. The first arrow on the left (the skinny arrow) shows the time period when the XAU was walking outside the upper band. Note how effortlessly the market moved higher over a period of weeks. The second, much thicker arrow, shows the more serious top, which occurred with the XAU rising back up to the upper band from INSIDE the band. That is the hallmark of topping action and that is what is NOT happening right now.

Historical XAU Index & 200-Day Bollinger Bands: 1996

In the next chart, I show the action in 1993-1994. Now, the analysis here was a little more subtle. In early and mid-1993, the XAU was trending strongly up and outside the 200-day upper band for weeks—all the while gaining more and more ground. It wasn’t until late July that the Index began to struggle to maintain itself outside the upper band. By that time, huge bearish divergences were present on a slew of technical indicators. Those divergences, combined with the failure to really get materially outside the upper band, set up the sharp correction between August 2^nd and September 10^th, a correction which I avoided.

Historical XAU Index & 200-Day Bollinger Bands: 1993-1994

Yet another aspect of the 1993-1994 market action was the broader view. The early and middle-1993 impulse in gold stocks was very strong and spent a substantial amount of time outside the upper 200-day band. The correction of July and August 1993 then returned the Index to the middle band. On the first such go-round, that middle band is always powerful support. From there another huge 40%-plus rally was launched, which peaked at the upper 200-day band in early 1994. This was a top to be reckoned with and from that point (the fat arrow) the market turned down for over a year.

Next, we will look at 1987. Same pattern. A long, protracted period of advancing prices outside the upper band throughout the first quarter of 1987. Again, by mid-May technical deterioration had set in and warned of the approaching correction. However, note that during the time period when the XAU was outside the upper band, the gains added up very quickly as gold stocks have a strong tendency to make big moves in short periods of time. When they are way outside the 200-day upper band, you have to be in trend-following mode in order to lock in the maximum returns. We see stay in trend following mode until we see serious bearish divergences. Note again that back in 1987, the second attempt at the 200-day upper band in August 1987 failed “inside” and “right at” the upper band. From that point, the XAU became a high-risk proposition, crashing in October 1987.

Historical XAU Index & 200-Day Bollinger Bands: 1987-1989

On the chart below, we see the bull run of 1982 where again huge gains occurred while the XAU was outside the 200-day upper band. In May 1983, the XAU closely approached and failed just below the 200-day band following a deep medium-term correction. That marked the high again for a considerable period of time.

Historical XAU Index & 200-Day Bollinger Bands: 1983-1984

The point of the above is simple: When Gold Stocks are outside the 200-day upper band, the bias should be to the bull side as rarely, if ever, do the stocks make a significant top outside the upper band. In fact, if you look back at the last 4 charts, you’ll note that in 3 of the 4 instances, the gold stocks dipped back inside the 200-day upper band for at least a few days to as much as two weeks, prior to launching the final rally of the first bull run, i.e. the bull run, which preceded the first serious correction.

Also, in every single instance as double tops formed prior to the first significant down-turn, there was massive technical divergence, which warned of an approaching decline. This brings us to Points 2 and 3: Right now there are no serious technical divergences to worry about.

Reason #2: MACD is making new highs with Prices.

XAU Index & MACD: 2000-2005

As can be seen on the chart above, over the last few days the XAU 200-day average on the top clip (middle band) has just turned up. Prices often experience their most dramatic advances when the Index moves outside the upper band during periods where the 200-day average is rising strongly. Add to that fact, Short Term MACD closed today at 1.04% (what I call +4%), which represents a new two-year high. MACD measures market momentum and right now, like a ball being thrown up in the air, forward momentum is accelerating. Granted, down the line, weeks from now, momentum could begin to wane as prices continue to rise. Perhaps at that time, I will get concerned and start taking profits. But for now, MACD is making new highs and momentum is fully confirming the advance.

Historical XAU Index & MACD: 1993

In the chart above, I show once again the 1993 example. Note how MACD began to trail off and produce a series of lower highs even as the XAU pressed to higher highs in mid-July 1993. THAT was the warning sign of an impending market decline as the XAU was progressively unable to get as far outside the upper band as it had in earlier weeks. Note also that in early 1994, as prices approached the upper band from the inside in February, that MACD was tracing out its third cluster of lower highs with peak momentum seen in May 1993. That was an even bigger warning that the primary trend was getting exhausted. The same type of thing happened back in 1982–1983 with the vertical dashed line highlighting the point where the XAU had just double topped with MACD failing its prior high by a wide margin.

Historical XAU Index & MACD: 1982-1983

None of the bearish evidence is present now, which brings me to

Reason #3: McClellan Summation Index at New High

On the next chart, I show the McClellan Summation Index for Gold Stocks, which today went to a NEW HIGH for the move. That’s right a NEW HIGH. What’s more, the Summation Index is still not overbought and has not yet risen above +2,500. A reading above +2,500 would be quite normal and should be expected in this type of gold advance. In fact in all likelihood, we will see the daily Summation Index move up above +3,000 before even the breadth peak of the advance is established.

In looking at the chart, one could argue that the Summation Index is lagging behind the XAU, which has had a big move in the last few weeks, while the Summation Index has had a relatively modest move. That’s normal, as the Summation Index tends to turn slowly and will often lag very rapid trend changes by a week or two.

XAU Index & McClellan Summation Index: 2004-2005

Back in 1987, the Summation Index peaked at +3,321.29 (above 3,000) on April 15, 1987 and as the XAU recorded a short-term double top on April 27, 1987, the Summation Index very quickly crossed–over its short-term signal line, rendering a warning that the market had become overbought and was now beginning to correct.

Historical XAU Index & Summation Index: 1987

None of this has happened as yet during the course of this most recent gold advance.

Reason #4: Primary Trend Rate of Change Gauge Below +175

The GST Rate of Change indicator derived from my Primary Trend Model closed today at +103.66 and is still nowhere close to a medium-term overbought reading above +175. In the last 25 years, there has only been one instance (early 1994) where the XAU made a truly significant market high without the Rate of Change gauge residing above +175. To be clear, most often the Primary Trend Rate of Change gauge must be above +175 in order for the XAU to be approaching an important medium-term high. The proof is in the next charts, which go back over the last 25 years where it is plain to see that nearly each and every serious high in the XAU finds this gauge north of +175. No +175 or higher = no ‘set up’ for a medium-term top = simple as that!

XAU Index & GST Rate of Change: 2004-2005

Put another way, the Primary Trend Gauge Medium Term Rate of Change Indicator is telling us that the Gold Stocks are still not overbought enough on a medium-term basis to set up a serious market peak. In order to set up a serious high, they must first move higher and become even more overbought. The same message is being sent from my medium-term Up-to-Down Volume Ratio, which has an unusual scale of 1.15 neutral, 1.45 overbought and .86 oversold.

Reason #5: Medium Term Up-to-Down Volume Ratio Below 1.45

Looking back over the last 25 years, we are now on one of the longest time spans ever seen with regard to the Medium Term Up-to-Down Volume Ratio wherein it has NOT been above a minimum overbought reading of 1.45 or higher in 457 trading days. In the chart below, I show this gauge with three horizontal lines for overbought with the lowest of the three upper lines at 1.45. That’s the line we are focusing on. The neutral or "zero” line is thicker and comes in at a reading of 1.15.

Medium Term Up-to-Down Volume Ratio: 1980-2005

To put this into graphical perspective, I include the chart below with a Time Span Counter, my own proprietary work. Going back over the years, we saw the following streaks:

The average of the past 8 longest streaks of the last 25 years is 439.25 trading days. At present, the XAU, at 457 trading days, is currently the fifth longest streak. This fact strongly implies that we will see this market continue to advance, and in the process, continue to get more overbought in the near-term, which will lift the oscillator above 1.45 and end the streak. This Time Span tells us that a fully overbought reading on this gauge is historically overdue and that tells us to stay the course and not sell a single share of stock.

Intermediate Up-to-Down Volume Ratio vs. Time Span Counter: 1980-2005

The Intermediate Term Up to Down Volume Gauge with Time Span Counter on lower clip,
counting the days we have NOT seen an overbought reading above 1.45.

The trend in Gold Stocks is strongly up. Whether it is tomorrow or the next day—or the day after that—the next move in Gold Stocks should be (with overwhelming odds) strongly up.

For the time being, 113 is nearby resistance with 107.60 nearby support. All price action between those parameters is mere noise and should not raise alarm.

Consequently, all Long Positions should be held in anticipation of significantly higher prices as breadth, volume, and momentum all strongly argue there is more to go on the upside in coming weeks. I am lifting my medium-term target for the XAU to above 120, to the 125 to 130 zone. As a result,

Stay Long ….Relax and Enjoy the Ride!!!