The last several weeks have really changed the look of the HUI and the precious metals complex in general. In this report I would like to examine the HUI going back to the October 2008 bottom to the present. Its hard to believe the HUI topped out almost exactly one year ago at a price close to 640. This almost one year decline is the second largest correction since the bull market began back in late 2000. This correction was totally different from the one made in 2008. The 2008 correction was more of a crash whereas our most recent one year correction was a more controlled move lower. Either way you look at it a correction is a correction and there is nothing fun about them.
As the weekly chart below shows the 2008 correction was a crash – panic move lower, with many big long bars. It only took about 7 months to complete the move from top to bottom that totaled about 370 points. Our latest correction started in September of 2011 at 640 and it looks like the bottom was put in in July of this year at 370 for a loss of 270 points. It almost felt worse because the time factor was much longer even though the decline was 100 points less than the 2008 event. Anyway, the job of corrections is to produce pain either by a panic move or by a long drawn affair that wears most investors out. The most interesting feature on the chart below is the down sloping black dashed support and resistance rail that is over 4 1/2 years long starting at the 2008 H&S top. This S&R rail is a perfect example of how a trendline can divide the price action between support and resistance. The red arrows shows it acting as resistance and once it was broken to the upside the green arrows shows how it reversed its role and held support. It reversed its role once again in March of this year when it closed below the S&R rail again. This told us to be on the defensive again. The red arrow, in July of this year at 465, shows how the S&R rail again was back to playing its role as resistance which led to the second bottom which now we can label as a Double Bottom reversal pattern. If you look at the last two bars on the right side of the chart you will clearly see how important the last two weeks of price action as been. Two major resistance rail were taken out two weeks ago that has changed the total complexions of the one year down trend. The HUI now has a double bottom in place. It has traded above the support and resistance rail and is now trading above the blue downtrend rail of the bull flag. Most importantly it’s making a higher high something it hasn’t done since the bull market peak at 640 made a year ago.
The next chart is a daily line chart that shows the big H&S top that reversed the big rally off the 2008 crash low at 150. That H&S top was very large and showed some awesome symmetry between the left and right shoulders. No matter how bullish one maybe on the precious metals stocks when you see such a beautiful H&S top reversal pattern you better pay attention. I’ve extend the neckline to the right side of the chart so you can see how it still influenced the price action all the way up to last week. Below is negative and above is positive. Last week’s price action was extremely bullish as the HUI is now trading back above the neckline.One last note on the chart below is the H&S top basically hit it’s price objective at 370 which was the minimum price target.
Next I want to start showing you some shorter term charts that have some important patterns that are harder to see on the longer term look. As we look at smaller and smaller time frames we can fine tune what is happening in more detail. There is alot of information on this next chart that shows the one year black downtrend channel, five point bearish falling wedge and the double bottom reversal pattern. The chart below shows the red circle where the confluence of four resistance rail all come together at one point. The market speaks to you when you see how it interacts where all the important trendlines come together. The red circle shows you a bullish setup that is called an end around the apex move. It shows why 465 has been our key resistance level as all the important trendlines converged at one location and now the price action is trading well above resistance.
This next chart shows the 5 point bearish falling wedge and how beautifully the price action has behaved based on the top and bottom blue trendlines. You can see how cleanly the price action bounces between the top and bottom blue rails of the 5 point bearish falling wedge telling us that both rails were hot and would come back into play further down the road. After the HUI broke below the bottom blue rail back in March of this year, red rectangle, it wasted little time in declining to the first bottom of the the double bottom reversal pattern at 370 or so. From the May low at 370 the counter trend rally took prices all the way back up to the underside of the 5 point bearish falling wedge which had reversed it’s role from support to now resistance at 465. The bottom blue rail held resistance and the next decline began to the second bottom was underway. There was nothing on this chart, at the time of the backtest to the bottom blue rail, that showed any reason to be bullish. The HUI then began an eighty point decline off the 465 resistance point to 385 which would be the second bottom of the double bottom reversal pattern to the upside. This was the moment of truth for the HUI. Either it finds support at the previous bottom at 375 or it breaks down to new lows creating a much bigger correction. The second bottom held about 10 points higher than the first bottom which was showing some resilience if the face of all the negative news that was coming out at the time. The red circle shows how cleanly the price action was as the HUI worked its way higher taking out the overhead resistance rails. The price action in the red circle shows how the HUI hit the bottom blue rail again and bounced off in a 5 day decline. It then rallied up to test it again where this time the decline only lasted 3 days. What was happening was the bears were running out of ammunition and the bulls were getting stronger. Note the single bar that traded between the top and bottom rails of the 5 point bearish falling wedge. That was the last bar to trade below the top blue rail as it was still acting as resistance. The next day the HUI gaped above the top blue rail telling us the bears were exhausted and had very little fight left in them. There was a small 4 day backtest to what had been a resistance rail and now had reversed it’s role and fond support from the topside. After the backtest was complete and the bulls wasted little time moving price higher.
Next lets focus in on the double bottom and show in detail how beautiful the price action has been regarding symmetry. You have heard me talk about reverse symmetry in the past that means how you came down, in our recent case, is how you will reverse back up. What happens on the way down will have a direct impact with how the stock will move back up. I’ve add two green circles, one on the left side of the chart where the HUI was declining and one on the right side of the chart where the HUI is rallying. The brown horizontal support and resistance zone shows the double bottom hump at 465. That brown horizontal support and resistance has a direct influence on how the HUI broke below in a 4 point sequence breakout shown with black dashed arrows on the left side of the chart. Now focus your attention to the green circle on the right side of the chart. We have the same 4 point breakout sequence in play only this time its to the upside that completed the double bottom reversal pattern. After the backtest to point number 4 the bulls have had a field day as the bears are retreating looking for a place to setup their next area of resistance to stem the bulls attack. The double bottom measures to about the 550 area so we may find some bears there.
I want to show you one more chart that shows the double bottom and the reverse symmetry that is playing out to the upside. The double bottom has a price objective to the 550 area that also coincides with two previous highs that were made in March on the way down. I think we will see some type of reaction at the 550 area where the bears had some control creating a small double top.This will also help relieve some of the overbought condition that is starting to build. From that point we will just have to see how things play out over the short term.
As the charts above are showing the HUI is putting on the strongest rally since topping out last September. I can’t stress how important it is that the price action is now trading above most of the overhead resistance rails which is reversing the downtrend to an uptrend. A one year downtrend has now been reverse to an uptrend that could last one to two years. So far the price action has been absolutely stunning from my perspective. Let me throw in one more chart that is show the precious metals stocks are getting ready to start outperforming the metal. The HUI to Gold ratio chart also has double bottom in place. When the price action is rising the PM stocks are out performing gold. As you can see on the chart below the breakout occurred last week and now the precious metals stocks maybe in control for a while which is what I would like to see.
Alot of positive things have been happening in the PM complex that has been a long time coming. I really believe we are seeing the early stages of a true impulse leg up that is going to last possibly several years before this run burns itself out. I have been working on several long term chart patterns that I will show you when they have a little more time to develop. Suffice to say they could be very bullish for the precious metals stocks. All the best...Rambus