Sunday, July 08, 2007

PM breakouts galore

You will never see me pounding the table about an imminent break out in PM shares, because the nature of any technical call is fundamentally one of probabilities. Having said that I hope my readers are at least not surprised by the sharp moves in PM shares this week. The background was laid by the weak hands folding as evidenced by the extreme XAU put/call ratio on June 26. Those wanting to make sense of this move can point to a slew of industry positive news this week: the proposed three way merger between AUY, NTO and MDG, good drilling results from EGO and SLW, and last but not least, NEM clearing its hedge book. It all seems logical, but one can just as well point to the wave structure of this PM bull, and view this flutter of activity as no less predestined than phases of the moon. Now that’s food for thought.

What is clear is that PM stocks are breaking out big time. Volume was very high in big caps such as NEM and AEM, indicating institutional interest. A daily chart of HUI is shown below; similar set-ups are repeated in almost all its components. Perhaps more importantly, the HUI:GOLD ratio has also broken out cleanly in the weekly chart. I can now say with a high degree of confidence that the correction since last May was over.

So what now? The immediate resistance level in HUI is 369. HUI has had a habit of taking 3-4 tries to overcome a significant resistance level as it did for 362 in early April. So 369 is likely to fall on the next try. By the same token, some back-and-forth may be necessary before the old high of 401 can be overcome.

Another way to profit from PMs
The usual recommendation to a novice investor interested in harnessing PM shares’ leverage over metals is to buy an ETF (e.g. GDX) or a good mutual fund. I share that opinion. GDX has a high correlation to HUI and is becoming more liquid each day. In mutual funds, my favorite and the one I still own is UNWPX (US Global World Precious Mineral Fund). In fact, I like it so much that I own stock in the mutual fund company (GROW). Besides two PM funds, US Global also has some outstanding funds in natural resources (PSPFX which I also own) and emerging markets. It also manages off-shore accounts for Endeavour. The stock was once such a high flyer that it was on the IBD 100 list and attracted a lot of momentum players. Due to earnings disappointments, it has fallen out of favor and has been flirting with the 200 DMA for some time. It just successfully tested an important trend line and popped 6+% on Friday. The short interest, at 30%, remains very high. It may still face some tough comps this quarter but after that I expect it to respond to PM price action with good leverage.

Disclosure: I own GROW and a number of PM stocks.