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January 04, 2006

Update of the AMEX Gold BUGS Index
by David Petch

From last week, the upper 55 MA Bollinger band (in circled red) is at 287, up from 279 the past week (index was at 270 and closed at 277). The lower 55 MA BB is still declining, but when it curls up, a top is likely in place. Blue numbers on the right hand side represent Fib retracements of the advance since May 2005; no Fib level has been touched, suggestive the trend is still upwards. Short-term stochastics have the %K above the %D, with a rising lower trend line. Last week I mentioned that 290 must get taken out this week; this is imperative to see an alternate count (Figures 4 and 5) to see the HUI advance to 380-400. The current depth of the lower 44 MA BB signals at least a 2-3 month corrective phase before further upside would occur, so a continual advancement in the index. The only stocks of value to add positions to in the gold arena currently are junior producers (some mentioned last week) and others in the Gold Chest.

Figure 1

Blue lines on the right hand side represent Fib price retracements of the advance from May 2005 (as per Figure 1) and red lines represent Fib price extensions from various points. Areas with line overlap represent Fib clusters, which represent significant Fib support/resistance. A Babson channel defines the movement of the HUI, which oscillates from the top of the channel to the lower line. The next big Fib resistance is at 298, but the 268 representing the strongest resistance was taken out on the second attempt. Due to time restrictions of the wave pattern, a move to 380-400 in the HUI should occur rapidly if is going to happen. The moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the 50 day MA acting as support. The full stochastics are on a longer-term setting, with the %K above the %D. The trend is still pointing up, but the move is rather long in the tooth since the May 2005 bottom. Sticking with high quality juniors as one can tell is the theme the Captain and I are sticking with, since that is where the value will be found in the future. The gold bug rush has not fed down to micro-caps, many of which are well below the 2003 highs, many at their 2001-2002 lows. The rush will gradually filter down, but it takes time so patience will truly be a virtue.

Figure 2

The weekly HUI is shown below. For reference to the log scale chart on the HUI, refer to last weeks update. I kept things linear to show the lower BB positioning. The upper BB's are riding the price of the index, which is bullish to see the trend continue higher. One item that is worth addressing is the lower 34 and 55 MA Bollinger bands recently parting trails after being in close proximity for some time. The lower 34 MA BB is slightly higher than the past week, suggestive it is curling up. Prior data for the HUI suggests that when the lower 55 MA BB curls up, there is a 6-8 week lag in the lower 55 MA BB curling up. As seen in late 2003, the observations noted above were associated with a 2-3 month topping process in the HUI before it declined. This could occur too, but it indicates the HUI could top out the next month or so before declining. The full stochastics have the %K above the %D, two points higher than the past week to be precise. No sell signal has been generated, but when the %K crosses beneath the %D, it will switch to a sell. Given the depth of the lower 55 MA BB, it will take 4-6 months after the current move finishes prior to the start of the next up leg, so if this is wave [1].III forming, it needs to hit 380-400 in the next 2 months. Wave III will likely be a logarithmic move since wave I was, so to fit the trend, this sort of move is required. A stall below 290 implies it still is part of a wave II correction.

Figure 3

The mid-term Elliott Wave count of the HUI is shown below, with the preferred count shown in colour and the alternate shown in circled grey. All of the impulsive waves are defined as sharp rises, with the corrective sequences shown as sideways movements. The current wave 5.(C ) implies the wave structure is near the terminal portion of the structure before it finishes. If the 290 level is reached by the end of this week, I will be forced to switch my count to the alternate. In this game, one cannot second-guess the market because it will lead to losses at some point. With this philosophy, it prevents having a count bob up and down like a cork. The prior charts indicate the move is long in the tooth, yet to prove the alternate count is correct, it must continue the marathon to 380-400. Should this level be reached, it is without a doubt wave [1].III and the 4-6 month correction to follow will define when to step up to the plate to really buy more stocks. I would only add high quality junior gold stocks at this point, particularly those that have not moved much. Something like Tan Range (TNX.TO) has already run and purchasing a stock like that now could be dead money for up to one year (6-fold return in 6 months).

Figure 4

The long term Elliott Wave chart of the HUI is shown below. The reason I have stuck with this count so long is due to wave (B).II NOT showing an impulsive decline. I know there are many counts on the web showing it as an impulsive count, but I simply do not see it. If the above criteria pans out for wave III to be underway, then wave (B) would be labeled as wave [Y].II. The time relationship for wave II equaling wave I is January 2007. I do not think this is likely and if wave [B].II finishes soon, I expect wave [C].II to complete around April-June 2006.

Figure 5

I will update the US dollar tonight, along with a description of Etruscan (EET.TO), a gold and diamond play in Africa. By the way, I hope everyone had a good New Years Eve and all the best in 2006. I think we will all have a stellar investment year.

Note: This article was published on January 2^nd, 2006. After todays rise to 290+, we are definitely in wave [1].III, beyond the shadow of a doubt.

David Petch
TreasureChests.info

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