-- Posted 4 September, 2006 | |

When Wall Street returns from Labor Day vacation and the end of the historically sluggish "summer doldrums" period of August, it will find more than a few worthwhile trading opportunities from both a momentum and a relative strength standpoint.

The sectors that appear the most bullish from an internal momentum standpoint include the semiconductors (discussed in previous reports) and the silver stocks, which will be the subject of this review. The silver stock sector was mentioned in last Friday’s commentary as being one of our major "likes" of all the major stock sectors. The past two days (Aug. 31-Sept. 1) certainly rewarded our patience on the silver stocks that had been consolidating near recent highs as there were quite a few breakouts to new highs.

Indeed, Thursday’s and Friday’s trading sessions were a case of SS HILMO, our in-house proprietary indicators for tracking internal momentum of the silver stocks, really coming through for us. SS HILMO told us to expect new highs in several of the leading silver stocks, including Silver Standard Resources (SSR)I, Silver Wheaton (SLW), Hecla (HL) and Pan American Silver (PAAS) and most of these stocks did in fact make new highs on Thursday. SSRI was up 6.45%, SLW was up 7.87% and HL was up 6.03%. Most of these stocks were up further on Friday, with SSRI up an additional 4.77%, making it the top performer. Take a little profits on all four of these stocks right now.

After Thursday’s and Friday’s trading sessions had concluded we see that aside from the stocks mentioned above, the following silver stocks made new 10-week highs: CDE, ECU.TSXV, SBB:TSXV, QTA.TSXV. And the 30-day and 60-day SS HILMO indicators (which will be shown in the next MSR online update) kept on rising as of Friday’s close. This means there’s a good chance of further new highs in the coming days. In fact, SS HILMO is one of the best looking of our stable of hi-lo momentum indicators right now compared to any sector. The silver stocks are pointing higher, as mentioned last week.

With SS HILMO pointing upward in the near term, it will almost certainly pay to operate from the long side of those silver stocks showing the greatest relative strength, i.e., those that are already fairly close to making new 10-week highs or else those that have just made fresh new highs. The chart of Silver Standard Resources (SSRI) appears to be one of the most bullish from an interim perspective.

Another of our turnaround candidates and an important confirming indicator for the white metals sector, North American Palladium (PAL), is still on a track for a turnaround in the intermediate-term. PAL should be able to benefit from the strong internal momentum within the white metals sector in the upcoming weeks.

The AMEX Gold Bugs Index (HUI) closed higher by 1.23% on Friday *above* the pivotal 350 resistance level we’ve been watching, finishing the week at 353.22. The XAU index was up for the fourt straight day to close at 147.49 on Friday, just shy of its 150 pivotal overhead resistance.

The big news in the gold stock group on Thursday was the announcement that Goldcorp (GG) would buy Glamis (GLG) for $8.6 billion. This caused traders to sell GG, which fell 9.22% for the day and closed at $27.66 on heavy trading volume. But naturally GLG benefitted the most from this announcement as the stock soared 18.68% to make a new high and close for the day at $46.12.

Our favorite leading indicator for the gold stocks, namely Freeport Gold (FCX), was up 2% at $59.36. The upside move in FCX represents an upside breakout above that pivotal resistance level we’ve been watching and sends an important (short-term) leading signal for the overall gold stock sector. The bullish action in the silvers is yet another leading signal since the silvers typically lead the golds. The previous upside breakout to a new high in Inmet Mining (IMN:TSX), another leading indicator for the gold stocks, also suggests the XAU will soon be breaking out above 150 as discussed in a previous commentary.

Elsewhere within the sector the following gold stocks made new 10-week highs on Thursday: AEM, CBJ, HL, IAG, KGC and NG. This is an improvement over the past several days and there were no new lows on Thursday. This positive performance pushed up the reading of the 5/10/20-day GS HILMO internal momentum indicators for the golds and more importantly the 30-day and 60-day HILMO (hi-low momentum) indicators continue to rise each day. Remember, as long as the 30-day and/or 60-day GS HILMO indicators are rising there’s an excellent chance that several gold stocks within the sector should be able to make new highs in the very near term. There’s also a fairly good chance of a breakout attempt above the pivotal 3-month trading range resistance for XAU next week, with this resistance intersecting the 150 level as previously mentioned.

All in all, the weeks and months ahead look promising for several important stock groups and could well prove to be rewarding to the patience of those who have waited out the languid weeks following the June lows.

Clif Droke is the editor of the daily Durban Deep/XAU Report, a technical forecast and analysis of several leading gold and silver stocks, including DRDGold and the QQQQ available at www.clifdroke.com.  He is also the author of several books, including "Turnaround Trading & Investing."