Chart of the week: Scene set for ‘mammoth’ rally phase at this blue chip

Is Randgold ready to shine?

The shares of this major gold miner swing mainly with the gold price – but not always. In common with all miners whose cost of production lies well under the gold price, a small increase in the latter can translate into a leveraged gain in the shares (it works in reverse, of course).

And that is what I am looking for currently. And a trade here would qualify as a Buy Low/Sell High candidate because the shares are trading at an 18-month low.

Here is the action in gold over the last two years:

Source: interactive investor                 Past performance is not a guide to future performance

Basically, it has suffered 3½ big swings from a low of $1,220 and high of $1,360 – a relatively small span of only $240. And here is Randgold (RRS) over that same period:

Source: interactive investor                 Past performance is not a guide to future performance

Up until January, the shares more or less moved with the gold price, but starting in February, as the gold price stabilised, the shares started a sharp bear phase, moving from £72 to a recent low at £56. Then, the gold price caught up by moving lower.

That action is a result of the reverse leverage effect. The shares have been beaten down harder than the gold price.

But is the gold price – and Rangold – poised to move higher now? I believe so – and here are my reasons.

Gold futures are traded on Comex which sets the global pricing benchmark – and currently, large speculators (hedge funds) hold the smallest number of long bets since July 2017 and from sentiment data, the percentage of bulls is only 10%, which is near a record low. So, everyone is bearish gold! Why buy gold as insurance when shares are rocketing?

And that sets the scene for a mammoth rally phase. Remember, markets exist to punish the majority. Highs are set when all are bullish and vice versa.

Are there more clues? Here is the long-term Randgold chart going back to 2015:

Source: interactive investor            Past performance is not a guide to future performance

The low in early 2016 was set as the gold price plumbed the depths to $1,050 before starting a vigorous rally. And Randgold rallied with it which took place in five clear textbook impulsive waves.

Having completed the fifth wave at £98 in July 2016, the market started a corrective phase which I have marked A-B-C, and where the C wave has just entered the area of long-term support at the £58 area and on a strong momentum divergence. This is showing that the selling pressure is drying up.

Back to the daily chart, the recent low was also put in on a very large momentum divergence and on Friday came up to test my minor pink trendline.

A clear break above it should indicate the low is in and a vigorous rally phase can get started. My initial target is the £70 area.

A break of the £56 low and a close below it would put a hold on this forecast, but I do not see much more downside if that low probability event occurs.

John Burford is the author of the definitive text on his trading method, Tramline Trading.

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