My last article suggested a correction ahead for silver and gold as we faced a possible dollar rally of some strength. But how does that leave the stocks that are intimately linked to the fortunes of gold and silver, especially the basket of unhedged equities constituting the HUI?
The chart below gives the long-term view of the HUI index. Not surprisingly, it closely tracks the performance of gold since its bull market began in 2001.
But since gold has been a proxy for the dollar, so the HUI has also been a proxy for the dollar, albeit even more leveraged than gold or silver. Here is the corresponding US dollar chart:
One can compare the peaks of the HUI with the troughs of the dollar. The dollar's double top in 2001 was match by the HUI's doubling from a value of 35 and then more than half a year of meandering whilst the dollar finally made its mind up to begin its 3-year downtrend. The HUI broke its 200-day moving average at the beginning of 2002 and began its counter-dollar surge (see first chart). Since that day, it has bullishly stayed well above the 200-day MA. The same can also be said of the dollar but in the opposite sense. Rather, we have seen a tighter line held on its 50 day moving average.
The Elliott Wave analysis of the HUI on the face of it seems a no-brainer with a fairly well defined impulse wave ending in late 2004. Since then we have been in correction territory, indeed a correction of a larger degree than the two previous ones of 2001 and 2002. As experience suggests, corrections always prove to be more complex than the impulse wave before them.
Given the prospect of a dollar rally, we may expect the correction to go on for a little while longer or break through the triangle to the downside. However, the count in the HUI chart suggests we may be tracing out a contracting ABCDE triangle with C just completed and D to E to go. Note that like our silver chart of the last article, a symmetric triangle encapsulates the whole year and a half long correction (see that article for a fuller description of symmetric triangles). The bounce of the lower triangle line three times in the last nine months suggests it has some stiff support to offer and may not be breached. That will depend on any strong dollar rally.
Conclusion? Some kind of breakout is imminent. If the dollar rallies more, the previous low of 163 could be tested. If the dollar rallies insipidly, it will be more meandering until the old highs are surpassed.
That leaves the question of what lies beyond this year old correction on a larger scale Elliott count. The chart gives some clues but I hope to address that issue in the next issue of my newsletter New Era Investor. Please go to www.newerainvestor.com to buy the first issue as a sampler or take up the whole annual subscription.
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