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January 31, 2005

De-Constructing HUI - A Technical Road Map
by David Petch

The article today is an important technical breakdown of the HUI and the implications that certain components of the wave structure are pointing to preferred counts. This article is meant to serve as an updated "road map" of the HUI for the next 12-18 months. For those who have not read any articles by myself, I follow Glenn Neely's approach to Elliott Wave Analysis. He wrote a stand alone book titled "Mastering Elliott Wave". If you do not have this book I recommend picking it up. There are some important additions to his procedure since the book was written in 1988. The two points below should be read and understood, especially the component for what defines an impulsive wave. This is critical, since failure to observe this rule will often result in the wrong labeling of a wave pattern.

Diametrics

I requested this information from Glenn Neely, since he discovered these formations after his book "Mastering Elliott Wave." This is verbatim:

"A diametric formation is a NEW pattern I (Glenn Neely) made in 1990- about two years after I finished Mastering Elliott Wave. As a result it is NOT mentioned in the book.

"A diametric is a 7-legged formation (Triangles are 5 and Flats/Zigzags are 3) that does NOT involve an x-wave. As a result, instead of a-b-c-X-a-b-c, I had to continue with the alphabet, labeling it as a-b-c-d-e-f-g. The distinguishing factor of a Diametric is the similarity of each wave segment in time and complexity to the other six. In Flats and Zigzags, time/complexity differences are extreme between waves a, b and c. In Triangles less so, in Diametrics similarity is the rule.

"In general, Diametrics appear to occur in two main categories. One, which is a period of expansion, is evident during waves a-b-c-and d, the period of contraction for waves e-f and g. or the reverse occurs. Contraction first during the first four wave segments then expansion second for the remaining three.

"This creates the look of a bowtie for the first series and a diamond shape for the second."

One More Important Elliott Wave Tid-Bit

In his book, Neely says all impulsive patterns must contain an extension. He clarifies that in the Sept 96 Futures article "...the trending wave (either 1,3 or 5) that traverses significantly more price than the other two is called the extended wave (price extension); the trending wave that traversed significantly more time is called the prolonged wave (time extension); the trending wave that possesses significantly more subdivisions is called the subdivided wave (complexity extension). NeoWave demands that every impulsive pattern possess at least two of the three above Rules of Extension. Failure to meet that requirement indicates the pattern is not impulsive - it is that simple".

Those are some items that are not readily available, so I hope that helps to clarify why some impulsive counts I may have are different from what classically is considered an impulsive segment. For the most part, these additions increase the accuracy of the count significantly. There is a couple of CD"s on Ino that have further information that Glenn Neely has developed. One final note: wave 2 of any degree can retrace up to 99% of wave 1, however, that would be one segment of the correction and wave 2 would likely complete at a 61.8% retracement. In general however, if wave 2 retraces more than 61.8% (there are exceptions, but very few), then the wave structure is not impulsive).

Analysis of the AMEX Gold BUGS Index (HUI)

The HUI has been chopping sideways for the past two weeks, further driving the consolidation phase. The Bollinger bands are suggestive of some light being present at the end of the tunnel. During declines, the upper 55 MA BB when it begins to curl down is a sign that an interim bottom is in place. The upper 55 MA BB recently has curled down, albeit shallow. The lower 55 MA BB has declined well beneath the cash value of the index and when it begins to curl up, it will be a good indication a bottom is in. The upper and lower 21 and 34 MA BB's are starting to near a convergence point. A chart further on suggests when a turning point will occur. Notice the purple horizontal trend line showing 200 as firm support. The short-term stochastics had the %K move beneath the %D. I do not want to hazard a guess as to which way the pattern will weave, since it could turn on a dime. The recent action in the HUI does suggest further consolidation. Refer to Figures 4-6 for the Elliott Wave counts of short-term, mid-term and longer-term views of the HUI.

The moving averages are starting to head toward a focal point. A long-term trend line was drawn in purple to illustrate the behaviour of the index, using it as long-term support. The full stochastics shown below have red lines at the %K crossing above the %D (buy) and green lines to show the %K crossing under the %D (sell). The setting chosen is equivalent to 11 weeks. Notice the purple circle highlighting the %K line. It is below the low place in May 2004 and no other point during the start of the bull market in 2001 has the %K been lower than the current level. The %K is still in the process of bottoming.

The weekly HUI is shown below. There is a lot going on here, so I will slowly break up the points. A Gann fan was put in place to show the 1x1 line (red) has been holding support of the index since the inception of the bull market (Note: this has a very similar slope to the purple line drawn in the prior chart). Fibonacci retracements of the move from 35 to 258 are shown on the right hand side. The HUI went a hair below the 38.2% retracement in May 2004 and has since been placing in higher lows. The Bollinger bands up until recently had the lower 55 MA BB oscillating at increasing amplitudes as the pattern developed. The flattening of the 55 MA BB suggests an eminent break to the upside is looming. Also, Fibonacci time dates of the move from late 2000 until December 2, 2003 are shown at the top portion of the line. The 61.8% time frame is in early October of 2005. I do not think wave III will start at this point, likely towards the end of 2006 (this would be a near 1:1 equivalency of the entire wave I and wave II). Please carefully review Figures 4-6 before Figure 7 (You are here chart) so see why late 2006 is a likely starting place for a very powerful wave III. Notice the full stochastics have the %K reaching a similar level to May 2004.

The short-term Elliott wave count of the HUI is shown below. This chart is probably the most revealing of the lot, with key technical issues that dictate the two likely paths of the HUI. One point I would like to clarify among subscribers is "why did you not choose the start of the current decline to the left of the "X" at top of the chart?" Good question. The pattern down is clearly a corrective (:3) pattern. The elements of what determine an impulsive wave pattern does not meet the criteria, so this possible count was discarded. The preferred count is that wave Y is forming a zigzag (5-3-5); wave [c] of this zigzag is likely nearing completion, with the wave v of sub-Minuette degree placing in a terminal impulse (ending diagonal). This pattern is likely to remain above 200. The alternative count is that the decline in May 2004 was wave [A].II and the move up was wave [B].II. Wave [B] had an impulsive nature to it; it could be counted corrective, but at a much lower probability. Wave [C] would be underway if this was true. The circled grey counts represent the alternative count. Wave [iv] would be complete and wave [v] would be underway. Wave [i] was extended in time and complexity and wave [iii] CAN NOT be the shortest impulsive wave. Wave [iii] represents 18 points, so wave [v] can not be over 18 points long or the count is wrong and the HUI is likely to head to 175. Wave [v] started at 212, so the lowest it can go is 194. A move to 190 is bearish for the short-term. As seen below, 200 is formidable resistance and if the alternate count would come into play, there is good evidence that a decline to 194 would be the lowest level. I would not recommend adding positions to gold or silver stocks until 215 in the HUI is broken (pending 190 is not broken first). The pony up price may be higher, but it will not be dead money.

The mid-term Elliott Wave count of the HUI is shown below. This time frame captures the entire correction of wave II thus far since the December 2003 top of 258. The alternate count shown on the prior chart would have wave B labeled as a flat. The red circle shows the pattern previously mentioned as being corrective in nature. The areas marked with the thin black lines denote bullish and bearish breakout regions of the HUI. I have termed the current positioning of the HUI as "HUI Purgatory", because it sure feels like we are waiting around for something. The 61.8% retracement of wave (A).[X]  is shown on the right hand side at 197. Waves W and X together have a shorter time frame for the current wave Y forming. Feburary 3^rd is the 1.23x Fibonacci date and February 10^th is the 1.382x Fibonacci date. This strongly suggests the HUI is going to see some action in the coming week or two. Of note, wave [c].(Y).[X].II is nearly 61.8% of wave [a].(Y).[X].II, a typical occurrence among zigzag patterns.

The longer-term Elliott Wave count of the HUI is shown below. The entire move of wave was slightly over 3 years. Figure 7 shows why wave II is likely not going to complete until late 2006. The pattern I have been building up to is that wave II is a running correction: Wave [W]-[X]-[Y], where wave [X] is a zigzag (5-3-5) and wave [Y] is a triangle (3-3-3-3-3). The prior two charts have already provided detailed descriptions of the current correction, so it will not be discussed. Notice how the longer-term trend line and the shorter-term trend lines have not been broken. The HUI is likely to finish the current decline within the next 10 trading days in the range of 194-200 and advance up to 280-300 by July/August. After this a large triangle lasting 12-16 months is expected to form.

The current chart is a "You Are Here Chart." The start of the green represents the current time frame in good ol January 28^th, 2005. Notice the full stochastics have had a rising trend line since late 2000. One important feature of impulsive waves is wave III CAN NOT at any point in its development touch the established 0-2 trend line. If it does, it is not the starting point of wave III. I do not believe there is enough of a coiled spring present for wave III to initiate; rather the running correction scenario I proposed in September 2003 is in effect. The hypothesis has worked well up to this point, so I see no reason to discard it until it fails the test. The 0-2 trend line is shown below. The earliest point of wave III realistically starting is in late 2006. Wave (C).[X].II is very close to developing, taking the HUI up to 290-305ish. The triangle is likely to have wave (A).[Y].II decline to test the 260 region and form the triangle structure shown below. Since the wave [Y] is defined as a non-limiting triangle, it increases the probability that the index will run to the apex of the triangle (convergence points of the upper and lower triangle line). Non-limiting triangles also can terminate 40% before the apex, but this would put the slope of the 0-2 trend line too high up (it already is overlapping the early waves of wave I). When wave III commences, hold the gold and gold shares because the move should last until 2009-2010. Wave V is when it will be time to unload. Note though this will be a very volatile wave to trade, but most of the money is made near the top.

I hope this article will serve as a road map for the next 12-18 months of the HUI. Should 190 be taken out, then a decline to 150-175 is in the cards at a later time this year.  There would be a rise in the HUI to around 210 or so if 190 was taken out and this would be a time to sell prior to a down leg occurring. As mentioned above however, I do not see this having much merit at the present.

One final note: Glenn Neely in an interview on Jim Puplava's wonderful Internet radio broadcast show stated the S&P 500 Index was in wave (IV) and had another 10-15 years left in the bear market. He implied the lows of 775 in the S&P would remain intact. A penetration of this level would have him re-evaluate his count. We currently are in an inflationary environment and the nature of mankind and nature is to advance in logarithmic progression. An S&P at 800-900 in 2014-2015 will be equivalent to the S&P at200-300, so do not worry; there will be pain felt later on. I have a derivative count of the S&P according to this.

This article is typical of one posted at our site. I try to have one editorial per week, with four other articles mainly updating the other specified index (with minor editorials if points of interest are found throughout the week). The AMEX Gold BUGS Index (HUI), US dollar index, S&P 500 Index, AMEX Oil Index (XOI) and the 10-Year US Treasury Index (TNX) are updated once per week, with brief updates on other days when warranted. (Minimally 4 charts per index.) Captain Hook also provides excellent market timing and the best "macro" or big-picture commentaries on the web. If you are interested in our services, please contact us at www.treasurechests.info.

David Petch
TreasureChests.info

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at http://www.treasurechests.info.

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