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Update of the AMEX Gold BUGS Index

This article was originally published on Monday, February 6th, 2006. Although the article was published at the beginning of the week, it identifies the current trend and what to expect over the coming months. Other components of this update (10 Year US Treasury Index and Amex Oil Index) are not included.

The HUI as all know has had a parabolic move develop over the course of the past 8 ½ months. The chances of a top being put in for wave [1].III is now quite high and what to do? For most, wave [3].III will come like a thief in the night, much like the explosive move that developed from November 2005 till present. My recommendation would be to stand pat with current positions unless they are highly speculative plays and add to positions once a final bottom is established 6-8 months from now. All upper Bollinger bands are well above the index price of 332. Figures 8 and 9 show the Elliott Wave count for the move and why a top is likely in place. The lower 55 MA Bollinger bands is well below the index at 203 and should take 6-8 months before it reaches a level set to allow wave [3].III to commence. The short-term stochastics have the %K above the %D, but it has curled down and is set to break beneath a wedge. The decline in the pattern, pending upon the depth and speed of the correction should take 1-2 months before an initial low is in place. Notice the negative divergence the most recent two peaks of the short-term stochastics had relative to the HUI advance (both denoted in purple. A negative divergence of such different slopes usually signals rapid downside to the origin of the divergence i.e. the HUI should have an initial low around 300 within 2-3 weeks. The star performers for the next 2 ½ to 3 years are going to be the junior producing gold companies. The big companies are going to go bankrupt in the coming decade unless they replace their deposits. The cheapest way to go about such a task is to simply buy out junior companies that are producing. As many have likely noticed, many of the microcaps have not even participated in the HUI advance the past 8 months. Some gold stocks have doubled and may see partial retracements, but that is part of the normal progression of a bull market. As you will see in the XOI update, it too has corrected to the downside and likely will start its wave [3] around the time the HUI starts its wave III.

Figure 1

A purple line hugging the HUI from May 2005 until present denotes the parabolic move. The recent decline to 332 has brought the index dangerously close to the parabolic support line. An inevitable breach of the parabolic trend line will result in a decline that should see a move back down to 280-300. Given the recent state of the HUI, I would avoid adding to further positions at this point in time. If my count is wrong and the HUI jumps up to 400, then the ultimate point of the parabola would be reached with a sharper decline to follow. Lines on the right hand side represent Fibonacci price projections based upon wave advances projected off of subsequent lows. Areas of line overlap are Fibonacci clusters, which represent important support/resistance levels. The 335 level was the first support level, which is now resistance. The next strong support level lies around 290-292. The lack of Fib support between the 292-335 level suggests the leg of coming decline could see a sharp move down when it takes force. The full stochastics have the %K above the %D in a wedge pattern developing since March 2005. The %K breaking below the %D and then the lower wedge trend line would suggest the parabolic move was complete. The correction of wave II was a large structure, because the prior wave I was 3 years in duration. More and more people will come on board in wave III, so the pullbacks will become shorter and shorter. The moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the 200 day MA at 225. There will be a certain length of time required for the 200 day MA to reach near the current level i.e. June-July before wave [3].III starts.

Figure 2

The weekly HUI is shown below, with the weekly bars in Candlestick format. The lower 55 MA Bollinger band is highlighted with a red circle to compare to a prior portion of the index (red circle to the left hand side of the chart). When the lower 55 MA BB curls up, a bottom will be guaranteed to be in place. The HUI had 3 single events occur to make a top likely in place: i) the Fib price projection of 0.786 at 347 was touched, ii) The 38.2% retracement level of the Babson channel (upper dashed line) was also touched and iii) a shooting star candle was in place. These three events occurring at on a single day, combined with the parabolic trend line nearing completion suggest a top is in place. The HUI could continue higher to make the parabola extend to the upper limits, but has a lower probability now. The full stochastics have the %K above the %D, but appears to be curling over. When the %K curls down on the setting below, a top is usually soon in place, with a subsequent crossover beneath the %D 3-4 weeks out. Best to accumulate cash for the bottom around mid-year before wave [3].III is christened.

Figure 3

The mid-term Elliott Wave chart of the HUI is shown below. Wave (1) and (3) are much shorter than wave (5) and as such the pattern is similar to wave [5].I being the extended wave. The (2)-(4) trend line extends to 280-300 5-7 months from now. One thing that could happen is seeing the current top subdividing higher, which would put the HUI at 400 or more. If the 2-4 trend line of wave (5) gets breached in the coming 1-2 weeks, then it confirms the move since the wave (4) low was complete. I did mention an alternate count was possible a few weeks ago, but I have not been able to reconcile a structure that fits with any degree of certainty. I will take another whack at it during the week and will present it if I see something. A structure of near completion is a red flag to not add to further positions until wave [2].III is complete (6-8 months from now).

Figure 4

The long-term Elliott Wave count of the HUI is shown below. Wave I had an extended wave pattern, like wave [1].III did. The parabolic move of wave [1].III is likely complete after all of the technical indicators from the prior 3 charts suggested. The green lines on the right hand side show the thought pattern the HUI will decline in over the coming 6-8 months. Please remember this is a guess. I can use the time relationships to suggest wave [3].III starts in 6-8 months near the 280-300 level, but the exact path is an uncertainty.

Figure 5


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