Recently we have been focusing on a plethora of fundamental reasons to justify our interpretation of charts in precious metals markets, which in our opinion should resolve in a bullish fashion intermediate term. Today, we will flip the formula around and hone in on the charts, allowing them do the talking, effectively filtering out the noise of an information overload environment that is now accepted as par for the course. As you know from our last meeting, the introduction of the Amex Gold Miners Index (GDM) has brought us a new and valuable tool for analyzing the sector by providing an enhanced degree of clarity in the picture, and by aiding our predictive capabilities. An expanded study of this measure will comprise the focus of this excursion in technical analysis.
First things first however, as in a rush to get the last commentary out to you in a timely manner, we not only confused the heck out of some people because of a comparative overlap in one of the charts, the projected measure provided was incorrect. Here is the correct measure for the 'inverse head and shoulders pattern' in the Amex Gold Bugs Index (HUI), which although it will likely reach the 485 target last denoted at some point, only projects up to the 350 area this time around. (See Figure 1)Figure 1
There is much information included in the chart above, including a projected chain of events that should transpire if the bullish X-Wave scenario is to prevail. Notice we are expecting a continuation in the corrective process down to the 205 area, which would meet not only a Fibonacci time requirement, but also be a 50 percent retracement of the prior wave. If prices chop their way down to the target area over the next two weeks, this would be a good fit, because momentum in the sector will remain bullishly buoyant, but at the same time work off the overbought condition in the daily chart. Such an outcome would set the stage for a sustainable move higher as described in the annotations above, where we would be looking for a 'double zigzag' to trace out, providing an identifiable wave structure to fulfill the measured move (MM) indicated.
With the 'golden cross' in the HUI last week, where the 50-day moving average (DMA) is now back above the 200 DMA, a 'buy signal' has been triggered, which without a doubt will bring technical buying into the picture, as evidenced by the strong bounce off power-up trend-line support on Friday. It is important to note however that if it were not for the panic buying in Gold Fields (GFI: NYSE) because of the rumor Norilsk wanted to prevent the reverse-listing through IMAGold of Canada (IAG: AMEX; IMG: TSX), and GFI's inherent departure from South Africa, the performance of the HUI Friday would have likely been much more subdued, in spite of bullish US economic data. Two relevant technical / trading related items strike me as being important at this juncture. First, it's not uncommon to see a consolidation in any market measure once a 'golden cross' has occurred. And the other is, and this is where our new measuring tool may already be proving its value in terms of the finer points, the GDM, which is a broader index compared to the HUI, has not seen a 'golden cross' as of yet, opening the possibility of further corrective action in the larger group. Here is a chart of the GDM, which includes the MM that looks probable once more consolidation likely takes place. Please note we used the word 'likely' in the previous sentence, as under the right conditions, precious metals (PM's) stocks could remain more buoyant than anticipated. (See Figure 2)Figure 2
As denoted in Figure 1, there is a very good chance we will witness what is termed a 'running correction' in PM shares as 2005 comes upon us, which in Elliott Wave Theory (EWT) terminology would involve the [X]-Wave of a [W] - [X] - [Y] series [Primary Degree] pushing prices higher than pervious highs within a 'double zigzag' format; but, which is difficult for most to understand, in the context of an overall corrective wave structure. It should be noted we have seen this before within the PM stock bull, where the final corrective wave higher topping in December of 2002 morphed the pattern in to a definitive 'running correction' (RC - denoted in red), signaling the market's ultimate intentions once restrictive forces had run their course. As you know, this fostered a subsequent run of over 100 HUI points just with the mild over-run of previous highs in forming an ascending triangle at the time. This time around, expect the triangle to be much bigger, and likely consolidating above current price levels before Primary Wave C gets underway. The numerous diamonds in the charts are supportive of this view, where a great deal of pressure is currently being built into the PM complex. Another pivotal observation can be made when the GDM is put against gold as well, where the lows seen earlier this year formed a 'triple bottom'. (See Figure 3)Figure 3
Triple bottoms are an indication of fundamentally strong support, which means prices will not likely visit this vicinity again for a considerable period of time, again supporting the notion low values for the current corrective sequence have been seen. Once this understanding is firmly established in your mind, you should then begin contemplating the implications of a Primary Degree [X]-Wave over-run above previous highs of up to 100 points in the current [W] - [X] - [Y] sequence, where prices actually ascend within the context of this corrective wave structure, and signaling an increasingly grander scale in the subsequent primary advance sequence afterward. Of course there are some technical hurdles that will have to be overcome before this prognosis is 'in the bag', not the least of which will be PM stocks as measured against gold on a weekly basis breaking back into a 'growth' trajectory, which means recent highs must first be overcome within the context of negating the bearish ascending triangle that broke prices to the downside in April of this year. (See Figure 4)Figure 4
In observing Figure 3, one should think of the lower triangle rail as a 'Primary Degree Pivot', where once broken to the upside, we should expect to see geometrically increasing progressions present in the impulses. Some investors call this kind of advance a 'melt-up', which would not be uncommon in the context of a 'triple-top' breakout that would be triggered in the HUI. (i.e. think Gann. ) Figure 4 is a shorter duration view of the weekly GDM / Gold Ratio that suggests the worst one should expect in terms of weakness near-term would be attributable to further testing from the triangle breakout indicated. This is a very strong argument to remain fully invested throughout a more severe corrective sequence if one should develop because there is no way of forecasting when it will end. And again, once this correction has subsided, and the larger degree / perfectly symmetrical 'inverse head and shoulders patterns' present not only in the GDM itself, but also in the ratio against gold is taken out, good times lie ahead for gold bugs, because it would only take a move in gold up into the $450 area to sponsor the MM's indicated in Figures 1 and 2. In fact, if the measure indicated on both the daily and monthly GDM / Gold Ratio charts were to coincide with a $450 print in gold, the GDM would be trading at 1500, which would exceed the MM's present in the index's themselves. (See Figure 5)Figure 5
Is this just pie in the sky talk? I don't think so, because one must appreciate the degree of elegance in terms of how both positive technical synergies and symmetries are coming together to paint this picture in the PM complex. Just look at the poetic symmetry found in the all of the 'inverse head and shoulders patterns' presented defining the GDM, where its not very often we will find an index tracing out such a large pattern spanning a decade in such a fashion. Notice how Fibonacci resonance metrics perfectly define the patterning and the fact a 'double top' spaced by eight years fell within two points of each other. Indeed, I find it hard to believe considering these observations, and knowing their relevance, that purely from a technical perspective an ultimately bullish resolution in the PM complex is not being signaled at present.
Then, we could look at what our 'progressive interval system' is saying about the move that has traced out in the GDM thus far, and what is being signaled for the future. They say a picture is worth a thousand words, so here is a picture with some words on it that speaks volumes, where it appears talking in terms of 25 and 50-point intervals as we do with the HUI would be out of context. (See Figure 6)Figure 6
Focusing on the HUI in this regard to provide direction in the short term, only a confirmed close under 200 for three consecutive trading days, the large round number, would suggest to us the right shoulder of all those inverse patterns you see above will correct deeper than is necessary to sponsor a move higher. (i.e. think of 175 on the HUI as support if stocks begin to plunge.) October is crash month for stock markets. Some remarkable parallels currently exist in present market conditions when compared to previous seasonal instances, not the least of which was the 1987 stock market crash. If stocks do not crash this month, which we think is probable, our own David Petch's X-Wave hypothesis has a very good chance of becoming a reality. If stocks do fall precipitously, the HUI will likely trace out a classic A - B - C corrective sequence down to the 175 area once again, so buying in the 200 area appears to suggest one would have an approximate 10 percent risk to the downside compared to upside potential that dwarfs this consideration. These are odds we can live with.
Turning to gold now to see what we can see in the charts, short-term, there is little doubt stretched open interest (OI) conditions at Comex could cap gold's advance temporarily, as Large Speculators are approaching a historically significant speculative position threshold. (See Figure 7)Figure 7
Based on last week's COT data however, the little guy may finally be jumping back on the bandwagon, with the only question being one of sustainability given poor liquidity conditions. Further gains in OI this week would be encouraging to say the least, and may tip the balance in terms of who will blink first this time around, Large Speculators or Commercials. (i.e. think 'commercial signal failure' and the short covering that would ensue.) (See Figure 8)Figure 8
If events turn out negative for gold however, and assuming demand does not continue to rise, the bankers will likely have little difficulty keeping a lid on prices. (See Figure 9)Figure 9
When we look at the gold chart itself however, especially in US Dollar (USD) terms, although it appears a pullback to the $410 - 412 area may be in the cards a la a further testing process associated with the breakout, strong support has been established in this area, where we would need to see a confirmed close below $412 spot for three consecutive days before entertaining bearish thoughts. (i.e. think physical demand.) Obviously if gold plunges to the $405 area for a day or two, but then finishes back above $412 within three days, expect prices to zoom afterward. Indeed, gold would be poised to appreciate approximately 20 percent in USD terms upon such an outcome. (See Figure 10)Figure 10
Longer-term, gold will obviously be affected by higher order considerations, along with factors that are capable of moving other significantly inter-related markets like oil and the dollar. In these respects, as well as others, there is little doubt gold remains bullish within the big picture. (See Figure 11)Figure 11
With macro-conditions in such a state of flux right now, I find comfort in knowledge the charts are painting an ultimately bullish outcome for gold moving forward, and the PM's complex at large, including the paper proxies. While it's true PM investors may have to suffer some short-term pain for long-term gains here, in the end, I am sure you will agree current events will appear to be a blip on the charts in full retrospect.
I hope you have benefited from this discussion, and as always, one can expect to see us back later in the week with more.
Until then, good investing all.