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December 15, 2005

Update of the AMEX Gold BUGS Index
by David Petch

Note: This article was originally posted on 05-12-2005

I am going to be exercising caution in the interpretation of the HUI in this update. Figures 4 and 5 show the Elliott Wave counts and minimally meet the requirements for the current upleg to be complete. The upper Bollinger bands are all above the index and in order for the trend to keep going the index must revert back to 270 within the next few days or a top is in place. The red lines on the right hand side represent Fibonacci price extensions from different points in the advance projected off the subsequent lows (waves 1 and 3; refer to Figure 4 for reference). Areas of overlap indicate strong Fib support/resistance. The HUI went to 269, which for all intensive purposes was at strong resistance at 270. The HUI could push higher as the price of gold moves up, but the impulsive structure for the HUI is in place; in other words, the HUI must keep on advancing on a daily basis, or the structure collapses, with wave [C].II underway. The lower 34 MA and 55 MA BB's are in close proximity and when they curl up, a top is likely in. I do not want to speculate on whether the HUI goes up another 15-25 points, because the outcome will still be the same: a 3-4 month decline prior to the next wave up commencing. The short-term stochastics have the %K barely above the %D in a rising bear flag formation; trading positions from this point forward is risky, but those holding core positions should view the coming decline as a final opportunity to pick up some cheap shares.

Figure 1

I went to bed early last nite to get an early start on posting this article and gold has already hit $540/ounce. This will be a sign of things to come, but I believe a sharp pullback is in store. In fact, the HUI may spike up to 280 to make an extended wave. I can say with confidence that a HUI print below 200 will not be seen in the next 10 years if at all during the rest of our lives (those over 30). Blue lines on the right hand side are Fibonacci price retracements of the move from May 2006 up until the present. The good ol' 50% retracement lies at 217, with my target remaining between 210-215. Next step, what length of time will the correction be? The current move up in the HUI lasted approximately 7 ½ months, so ½ to ⅓ the time should minimally be expected. Fib time projections based upon the current move up have the 50% and 61.8% time points in March and April 2006. The worst case scenario is a 1:1 relationship in time, making the correction last until the end of June 2006. During this corrective phase, I would strongly recommend saving up as much cash as possible and in March buy ⅓ bullion and the other ⅔ in companies like DSM.TO, NNO.TO and of course GoldCorp (G.TO). This will be the final opportunity to buy any high quality gold stocks before they make like the Internet stocks of the 90's. The moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the index well above the 50 day MA. The full stochastics are on a mid-term setting, with the %K above the %D. Once the %K crosses below the %D, then a top will be confirmed. The HUI could keep on going up all week, but it is a blow-off stage and the higher she goes the harder the fall. As mentioned earlier, the HUI is now likely to blow off to 278-280 before correcting lower.

Figure 2

The weekly HUI chart is shown below. Fibonacci price projections are shown 2/3 of the way up the chart. The 1:1 relationship for wave I and wave II lies around December 2006; I do not expect the coming correction to last one year, but 3-4 months. Fibonacci price extensions projected off the lows of wave II are shown in red lines on the right hand side. A Babson channel is in place, with 38.2%, 50% and 61.8% Fib channel lines. The action of the channel suggests price movements will ride either side of the central portion of the channel. Given the huge price move of wave I (7.37x higher than the starting point), the future movement of the HUI will be a logarithmic progression. Wave III should finish around 1074, as based upon prior calculations. The full stochastics have the %K above the %D and when the %K curls over, a top will be signaled up to one month before it crosses beneath the %D.

Figure 3

The mid-term Elliott Wave chart of the HUI is shown below. The defined move has three definitive impulsive waves, with wave [v] approaching a similarity in price compared to wave [v]. Wave [v] is extended in time and complexity, so the similarity of wave [iii] to wave [v] in price is not important (2/3 wave extension properties are met with wave [v]). I have labeled the current move of wave [v].5 as complete, but it could and likely will rally in a blow-off to 278-280, as mentioned previously. Wave 2 was a flat and wave 4 was a double combination (flat-x-non-limiting triangle). The wave structure is not evident with all the filling put in the chart, but finding clearly defined impulsive segments makes the task easier.

Figure 4

The long-term Elliott Wave pattern of the HUI is shown below. The green line shows the suspected path the HUI will follow over the next 3-4 months minimally. Wave I had a clear 5 wave pattern that lasted for nearly 3 years and wave II has been in place for 24 months. The alternate count for wave II is that is completed in May 2006 and wave [1].III completed or wave (1).[1].III. I do not think the alternative count is possible, because I expect a logarithmic progression to develop for wave III. If the wave completing was wave [1].III, then it should have hit 370-400 minimally. Because of the lack of a logarithmic expansion, I do not think wave III has commenced. What to watch in the coming months will be critical in the assessment for determining if the labeling I have in place is correct. The decline should be impulsive, as a 5 wave structure similar to the one finishing (likely shorter in the bottom, finishing around 210-215) or a terminal impulse structure (3-3-3-3-3). I think a terminal impulse structure is likely to occur, so watch for wave (2)-(4) overlap with each impulsive segment having a corrective sequence. The terminal impulse if it forms will take on the form of a wedge. Pending the form of the decline, it should finish some time between April to June 2006. The HUI is likely to have an initial sharp decline after a top is in place, with up to 1-2 months of hovering around 260 before heading lower.

Figure 5

The take home message is not to add further to gold stock positions at this point in the cycle, but rather to save cash and wait for an opportunity to deploy it in 3-5 months. As the pattern becomes evident, a bottom will become clearly defined and adding to positions before a breakout occurs will be recommended. Watching for high quality stocks will be easy: watch the stocks that decline the least during the coming 3-5 months, since these stocks are where money should be deployed when the time is right. That is all for now. I will update the US dollar index tonight and possibly the 10 Year US Treasury Index (if I have time).

David Petch
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