Is The Rally Over?

By: Captain Hook | Mon, Mar 15, 2004
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Newmont is painting some pictures we should all be taking notice, so lets do just that.

The first chart we will put up is a long-term chart of Newmont Mining Corp (NEM: NYSE), which presents the full specter of its impressive bull run over the past three plus years. (See Figure 1)

Figure 1:

Indeed a very impressive run, however is it possible NEM does not complete a five wave impulsive count? And if it does not, was the rally over the past three years simply corrective, destined to be entirely retraced one day? These are two very good questions, which we will attempt to answer for you now.

How can we do this with any degree of certainty? The answer to this question is we cannot provide you with categorical proof, but only probabilities and evidence, which will have to suffice. The first place(s) one must look to fit the peaces of this puzzle together is within important relationships NEM has with other key components of the gold complex, of which it is a very important part in its own right being the largest so called un-hedged gold producer in the world, and one of the primary components of the Amex Gold Bugs Index (HUI), which as you probably know is the broad measure of such companies in the market.

Therefore, it makes a lot of sense to take a measure of NEM against the HUI first, to see just how it's fared via its peers. (See Figure 2)

Figure 2:

Depending on how one views things, with NEM one of the supposed darlings of the institutional community when it comes to gold companies, you should be surprised to see the extent of underperformance against its peers traced out over the past three or so years, no? The answer is no, because one would actually expect lesser and smaller companies to perform better in an up-cycle, because of their greater growth potential. So, what will it mean if the above ratio breaks out to the upside?

Based on the above understanding, it will mean the bull run must be done, at least for a while, because in a down-cycle, investors will be seeking the less risky status of the larger producers with the resources to make it through those rough years. And based on the appearance of the above chart, a very sharp correction will ensue in the lesser companies, with micro-caps hit the hardest since they are at the bottom of the pile, since such a trend change will literally call into question their very survival.

And while we may simply encounter a normal correction when the break in the precious metals complex arrives, I find it puzzling NEM moved in what appears to be a three-wave corrective sequence against gold for the entire advance, where one would think that if we are in a bull market, normally characterized by five wave affairs, this would not have occurred. (See Figure 3)

Figure 3:

Puzzling indeed the above should be to you if still bullish on precious metals, as if the support line I have drawn on the chart above does not hold in the correction, which I believe to be upon us now in full force now, one may be able to pick up shares of NEM one day in the future below $30 once again, which would please me to no end.

But, and this is a big but, there are many technical and fundamental reasons to believe precious metals and their related equities are still in a bull market, which will be characterized by normal and healthy / energy building corrections along the way until proven otherwise, as although gold has not surpassed the 50 % retracement mark off 1980 highs of $556 US yet, if impulsive moves in the complex similar to the one we just witnessed return once again, the next leg up should do the trick. In this regard, we will be watching the 'inverse head and shoulders pattern' in the above chart for signals along the way.

Looking at some short-term considerations to keep in mind, as I am sure most of you are content to be holding your precious metals stocks, confident in the belief bull markets do not suffer large corrections. I can assure you this belief is a fallacy, as precious metals stocks are among the most volatile of sectors, with a 25 % correction in the metal often producing more than twice the decline percentage wise in its related equities.

Others may be waiting for confirmation the sector has officially turned down, and even though you may still be sitting on some sizable profits, I caution you, profits are a good thing, and losses are not, especially if you are over diversified in the sector beyond prudent portfolio planning metrics, or worse utilizing margin. But if you are one of those types that needs confirmation, and now knowing the importance of NEM in the big picture, a close above the 155 EMA in the NEM / HUI Ratio for three consecutive days would have to be it, based on historical standards and trend line resistance. (See Figure 4)

Figure 4:

Here is a chart outlining a potential result of such an occurrence. (See Figure 5)

Figure 5:

Here is a view of NEM against the dollar, and some technical considerations one should be contemplating presently. (See Figure 6)

Figure 6:

As far as bull market signatures go, the fact NEM only progressed 500 % against the dollar is not particularly disturbing considering the HUI went up ten times against the greenback, so there is every reason to believe the bull will be back in force after a breather, as a ten times progression is truly impulsive. But it could get quite scary for a while once the correction asserts itself with force, as the market endeavors to answer the bull market question, and possibly dealing with a bad case of asset deflation at the same time.

Thus, if NEM breaks $40 for three consecutive closes, and the HUI does the same at 215, we will be compelled to remove our positive view on the sector technically until conditions warrant a change in opinion. Does this mean precious metals stocks will go straight down? Heavens no, there will likely be significant bounces along the way, as both tops and bottoms are characterized by processes, and subject to volatility. What one does with this knowledge depends on whether you are a sophisticated trader, or an unsophisticated investor, where portfolio planning is key to your long-term success in the markets.

I thought you may want to know about the significance of what is happening out there in the precious metals arena presently before a more permanent break occurs, as although the corrective process could be characterized by a relatively flat pattern, it could also be very sharp as well. This would be my guess based on the complacency currently characterizing equities in general, and precious metals stocks certainly fall into this category, subject to the same liquidity considerations all others are governed.

And while some gold bugs may think me a party-pooper for bringing this to your attention, I remind you corrective processes are a natural part of any advance, where perhaps it is better to embrace the reality of the situation, as opposed to going down with an over loaded ship. Most assuredly, I would love nothing more than to see an advance characterized by high and increasing volumes commence off present levels, but the reality of the situation is we may see just the opposite, so be careful out there, as precious metals can remain buoyant for quite some time before they break down, even as the trend has changed.

Good investing.


Captain Hook

Author: Captain Hook

Captain Hook

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 very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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