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Our stops were triggered this morning on the HUI Gold Bugs Index, as AIG posted the largest quarterly loss in market history, at $61.7 billion dollars… pushing the DOW to new lows with a gap down open below 7000.

All last week, the HUI index flirted with breaking key support, but held HUI 285 on a closing basis. And with gold up $10+ in over night trading, it looked like the gold stocks were poised to rally today.

Unfortunately, the AIG news broke pre-open.

Thankfully,with gold still positive into the open, the small gap up open in gold stocks gave us some cover fire in which to exit as the DOW tanked. And within 20 minutes of the open, the HUI index and the GDX ETF rolled over along with everything else

By mid-morning, the 2 major HUI components Barrick (ABX) & Newmont (NEM) were down significantly more than the HUI, or GDX. And when that happens… you know the sector is being heavily shorted, and in for a painful day.

This rally in the gold stocks gave us a helluva ride, doubling from the late November lows at HUI 159, to the February 18th interim closing high of HUI 323.99.

Technically, the next strong level of support for the HUI is in the 240’s:

If the gold price holds $875, I think we should see strong buying support in the HUI Index begin to reappear in the 260’s and firm up in the 240’s. A traditional re-test of 50% of the move from HUI 159 to 323 takes us to the HUI 240’s. The major caveat being the correction in the DOW finding an interim bottom.

Here’s the present trading channel for gold:

Gold has held up much better than the gold stocks on all recent pullbacks, and it should form the base of your core holdings on corrections. Hopefully traders have already added some puts as insurance on this run back to $1000, but it is always better to be a little late in adding some insurance, than having none at all.

Gold needs to hold $875 for this bullish move to remain in place.

Right now, we need to be patient and let the gold stocks come back to support, and test that 50% pullback in the move, and wait for the forced liquidation and panic selling to subside in the DOW.

As we caught the bottom of this move in late November, our goal was to not give back a dime sub-HUI 285. So if you haven’t stopped out, added puts as insurance, or aren’t hedged via broad market shorts… you may want to do so ASAP.

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