AEM & Some Other Gold Diggers – Jan 9, 2009

charts courtesy of stockcharts.com

It was choppy week for some gold diggers that I follow. It would require nerves of still to stick to a position, long or short, overnight.

If there is something that the illustrious trading history of AEM of past few years does not lack, it is certainly opening gaps. I can attest to that based on the past couple of years that I have been following the stock.

Let’s look at a more recent history

This is a 30-minute chart of the advance from the October low. All pinkish areas are opening gaps up

This is 1-minute chart of AEM of the past few days. Pinkish areas are gaps up, bluish areas are gaps down.

There are traders who trade gaps in certain ways. Some fade them on sight. Some take them. Some wait for a fill, or penetration to do the trade. Any gap strategy here might have easily generated losses, small maybe, but losses.

I, personally, do not have a set-in-stone strategy for trading a gap. Every situation is different. To me, other things like larger trend, moving averages, support/resistance, wave count, etc, are more important than just a gap being a gap.

I also take into consideration how many unfilled gaps the issue has had prior to the gap I am considering for a trade.

What I think we are noticing here is a tug of war with some serious money involved between bulls and bears, throwing the stock back and forth, and crushing many traders along the way.

Maybe it’s a repositioning as some early buyer sell and some who have waited for a pullback buy. Maybe it was some preparation ahead of option expiration with some big accounts settling contracts.

Maybe AEM has become a vehicle of choice for day trading among deep pocket traders.

One thing I know is that extreme choppiness usually, but not always, happens when we are close to a change in trend, or a change in owners.

It’s been very interesting trading AEM these past few days, it took a lot of focus and attention not to drop the ball into a void.

Another Gold stock, Goldcorp (GG), on the other hand, was a relatively simple trading short with far less nuances.

Like an obedient dog, GG just followed the directive of the trend down. Mind you, we are talking minutes here not days.

A longer look at AEM shows a gradual shrinking of momentum on the 60-minute chart

We see some lower lows and lower highs after the beginning of 2009. Is this a top? Maybe. But it might as well be a simple correction/consolidation and nothing more.

Sometimes when I cannot decide right away about the longer term potentials of an issue, I compare it to something similar.

A comparison between AEM and some other gold stocks shows us that AEM has been rather strong.

Where AEM has corrected so far about 10% from its recent high, some other have corrected more

GG: 38% retracement

ABX: 25+% retracement

NEM: 25+% retracement

The precious metal ETF (GDX), however has not corrected that much

This tells me that some other components of GDX are probably holding the fort, like Kinross (KGC), for example

A look at the wave counts of some of the charts does not help that much either, as many of the charts can be counted as corrections as well as impulses. There are exceptions, Barrick (ABX), for example, cannot easily be counted as an impulse, Newmont (NEM) is also iffy.

They all, however, show a loss of momentum near their peaks. But retracements so far have been shallow. Shallow retracements are typically signs of correction. They may turn into something larger, but we are not there yet.

Also, they are all above their short term daily moving averages (Notable exception is GG, which is just hanging)

Another interesting thing to note is that some gold stocks have been underperforming the yellow metal, which usually is not all that good. It is still too soon to get excited about this, but with Gold itself having a rough week, this is something to keep an eye on.

Let’s take a look at this chart of Gold Mining industry group courtesy of my friend Bill Zimmer at http://www.prudenttrader.com/

It’s a mixed picture with short term breadth showing early signs of weakness/correction and mid-term breadth flattening.

Next week is the option expiration week. Gold stocks may chop around. I would watch momentum (especially on daily and 60-minute frames), volume pattern, and price action to seek further clues.

I think we are at, or slightly past a top, but I may change my mind on Monday. Also, I cannot say how big a top.

The mid-term trend of all gold stocks is still up, and we all know that going against the trend can be a dangerous proposition, as some recent gap hunters of AEM can easily tell you.

Some Food for Thought: if commodities, especially oil, continue to recover, will money not flow out of gold-related issues into oil-related issues? If markets recover broadly, will capital not go into other sectors of the market that have been neglected so far? If markets tumble, will gold stocks stay up ignoring the pull of the rest of the market?