Goldbugs perked-up this week, pushing the yellow metal higher in response to fears around the Cyprus banking crisis and its potential to start another contagion.
With the help of headline news, spot gold prices have risen to $1,614 — their highest in March. The rally should be kept in perspective, though, as gold prices are in a short-, intermediate- and long-term bearish technical trend, making the rally unlikely to continue.
The overwhelming bearish trend has a lot to do with gold continuing to unwind from an extremely overloved situation last year, when everyone was scrambling to own the commodity. Now that the overall buying frenzy has come to a close, the decaying technicals for gold prices provide a constant drip of selling pressure.
Looking at a weekly chart, pressure from the overhead declining 50-day (10-week in the chart below) should squash the recent rally, triggering another round of selling in the gold market. The good news for the gold bulls is that there should be some support at $1,550 again … though not for long.
The recent rally in gold shot a few gold mining stocks into short-term technically overbought territory, offering an opportunity for those looking for short positions in this otherwise bullish market. The two below top our list as stocks that are best sold at their current prices. More aggressive traders might choose to short these companies using April expiration options, as these companies will have a tough time moving higher:
Click to Enlarge Newmont Mining (NYSE:NEM) engages in the acquisition, exploration, and production of gold and copper mines. As you can imagine, the stock’s price moves closely with the price of gold. Recent prices shot the shares from a technically oversold to their current overbought signal, indicating that the price might have moved too far too fast and is due for a pullback.
In addition to the overbought reading, NEM shares are now trading slightly below their 50-day trendline, a trend that has offered staunch resistance since NEM traded below it in November 2012. According to recent short interest data, the current rally also served to shake the shorts out of NEM, meaning that the stock is not likely to see prices move higher due to short selling.
Given the technicals, we see a short-term target of $35 to $38 for NEM over the next two to four weeks.
Click to Enlarge Yamana Gold (NYSE:AUY) is a near carbon copy of Newmont. The company mines for gold as a primary metal, but also produces silver, zinc and copper among others. AUY matches the technical picture of NEM as a recently overbought candidate.
AUY prices hit support at $13.50 earlier this month and are now sitting 15% higher, which means that short-term sellers are likely to start moving out of shares. The short-term RSI reading for AUY matches the overbought reading from January, just before the stock slumped from $18 to $14.30 over a short four-week period.
In addition to the technicals, some proof of overhead resistance comes from the options market. Bullish options traders have been adding open positions heavily to the April 15 calls. Our experience is that large call, open-interest strikes often act as resistance for the underlying stock, meaning that the AUY will struggle to stay above $15.
Our near-term outlook for AUY suggests that the shares will slump to the $13 level, likely over the next four weeks or so. This outlook suggests that investors holding AUY may want to lock in profits now. Furthermore, traders well-versed in options trading might want to consider a short-term at-the-money put as a nice hedge for their portfolios.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.