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On April 5th, we wrote that gold stocks were on the verge of a breakout. The Amex Gold BUGS Index (HUI) did indeed break key resistance around 360 and charged/surged higher to 369. With this, sentiment turned positive and many gold bugs began licking their lips. However, the breakout failed to confirm and the HUI has since fallen back to around 335. That is nearly a 10% decline from its recent peak.

Experts chimed in with a myriad of reasons for the decline. Some said gold failed to react to the dollar's weakness, while others claimed that the U.S. economy is actually chugging along just fine, and that the dollar will find support based on recent strength in the manufacturing index. Even technical analysts are showing sell signals.

But sentiment always tends to swing too far in either direction. The human element in the market causes overreactions on both sides of the pendulum and this effect is even more pronounced in the gold market, which is already on a roller-coaster ride. It is just as the chorus begins to crescendo that you should stop, turn around, and run in the other direction. Of course, it takes an incredible amount of courage to play the contrarian and most investors have a hard time running head-first into the crowd.

So instead of getting cold feet, one might use this recent sell off (10% from its peak of 369) to increase positions. From a technical standpoint, everything will remain intact just as long as the HUI finds support around the 330 level. The triangle is still ascending and the series of increasingly smaller corrections still holds. In fact, the HUI would need to drop below 321 before this mini-correction would break that cycle and signal a serious correction is underway. Good luck and happy investing!

HUI Index
HUI Index