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Long Term Outlook for the HUI with Analysis on the S&P 500, and US Dollar Index

So far in the development of the HUI, the calls have been relatively easy for the HUI, due to the indicators and everything cooperating. A lot of shorter-term indicators are curling over, which have caused some to prematurely call a top and bail. I am jumping right to the analysis of the HUI, due to the volume of charts and the implications they carry for the up and coming year.

How does one trade this market? One can follow the two wise men Richard Russell and Jim Dines who say just buy and hold the bull market or trade one third their positions like Jim Sinclair suggests. I will never mention if I do my own trades, or recommend selling. That is up for one to do on an individual basis. But if one can time the dip coming up, then there is a chance to make some extra money and buy lower. That being said, it is sometimes easier to say than to do. The news now is starting to get very bullish on gold, which does spell a top coming in sometime during the next few months. Gold and silver is such a small market that overbought/oversold conditions may not mean much. With technical analysis (TA) we all have to try and overcome the fable of the three blind men feeling an elephant and giving a description of what the beast actually is. Each piece of TA used in describing the mechanics of a market is like that of a jigsaw puzzle; unique and has its own shape in the bigger picture. Only by piecing together all available technical pieces does the puzzle appear complete. In the markets though, no puzzle is complete because the markets are dynamic. As soon as charts are made they are out of date not gauged to the markets present condition.

Brief Commentary on Elliott Wave Terminology

I have had some people wondering what the heck w-x-y labeling means when I am labeling Elliott Wave charts, so here is a brief description. Corrective waves are as follows: flat (3-3-5) labeled a-b-c (can have strong, weak or normal b-wave,) zigzag (5-3-5) (can have normal, truncated, or elongated patterns), and triangles (3-3-3-3-3) labeled a-b-c-d-e. Within triangles you have limiting (occur in position b or 4, and are bound in advance by the widest leg of the triangle), or non-limiting (occur in x or y-waves and are not bound by height). Triangles can be contracting (of which there are horizontal, irregular, and running variations) and expanding (of which there are horizontal, irregular, and running). Wave 5 or c can have a terminal impulse (ending diagonal structure with a 3-3-3-3-3 structure, but it will have partial overlap of waves 2- and 4 (triangles have 60-70% retracements of each leg, and MUST have 5 components). Completion of each one of the above if it is a corrective pattern will complete one leg of a larger degree correction. Fitting higher degrees of a pattern involves piecing together “chunks” of corrective patterns to make it fit at that level. If one has a flat-flat-impulse (3-3-5) combined from above, that would make a larger degree count. However, if three corrective patterns (:3) are strung together, then the labeling w-x-y comes into play. (3-3-3). Prechter came up with this nomenclature and it is very useful, because one hundred words can be behind the choice of progression labels within the pattern. X-waves are their own beast. They can imply waves that are not present due to the time frame under study (monthly or weekly charts, sometimes daily), be wave of same size as the previous, be a smaller sized wave (less than 61.8%) or larger (161.8%). This one paragraph is very compact, and it does contain a lot of information, which in it has many pages of explanation that could go further.

Degree of Elliott Counts

I think now is the time to throw in the labeling scheme for Elliott counts. Some of the labeling schemes have been modified so a normal keyboard or typewriter can accommodate the labeling schemes. Using different colors to identify each different degree results in a more rapid digestion of the information present.

Degree Labeling Scheme (Corrective, then Impulsive)
SuperCycle (a) and (I)
Cycle a and I
Primary [A] and [1]
Intermediate (A) and (1)
Minor A and 1
Minute [a] and [i]
Minuette (a) and(i)
Subminuette a and i

Gold BUGS Index (HUI)

The first figure shows the HUI on the weekly scale. The lower Bollinger bands (BB) indicate another ribbon formation is in the process of forming. When the 34 MA touches or comes near the 55 MA, it is likely a top was put in. The stochastics set at 89,21,55 show the general uptrend, but now it is starting to slowly curl over near the top. Figure 2 shows the daily chart with BBs and full stochastics. The lower 21 MA BB should go sideways prior to signaling a decline. Also the lower 34 MA BB should rise up closer to the 21 MA before a decline occurs. The stochastics are starting to curl over, so watch carefully. With the S&P, this occurrence was nothing more than a negative divergence, but we are starting to see the first signs that the wave pattern is getting closer to termination. To try and gauge things a little better, I set the stochastics to 144, 13,89 in Figure 3 with channel lines. The settings here should NOT issue a negative divergence. When the %K crosses the %D, the top should be in. The stochastics has a rising channel, so we could see more upside, but again, watch the progression of the pattern. RSI not shown is one of the few indicators that show more upside in the HUI. Figure 4 shows the HUI with moving averages and MACD. The 50-day MA is still well above the 200 day MA. The MACD set at 5,34,5 has had a two-year uptrend, with the upper lines nearing convergence. If we have one more upleg, this should stretch up higher but a crossing of the faster moving line over the slower is bearish should it occur. If the HUI should break down, the lower 21 MA BB should be hit then sell into the HUI hitting the 21 MA on the way up prior to declining.

Figure 1. Weekly chart of the HUI with Bollinger Bands and Stochastics

Figure 2. Daily chart of the HUI with Bollinger Bands and Stochastics

Figure 3. Daily chart of the HUI with Stochastics Set at 144,13,89

Figure 4. Daily chart of the HUI with Moving Averages and MACD.

Figure 5 shows the Elliott Wave count currently for this upleg of the HUI. The conclusions of the chart were based on trendline analysis and Fib relationships between the waves of minute degree of wave 3. From the move since 2001, the lengths of the waves are as follows: wave (1) = 40.7, wave (2) =16, wave (3) = 94.8, wave (4) =37). On the degree under study here, which is wave (5) of intermediate degree, the length is currently around 89 price units. If this were to be the extended wave in price, then 1.618x wave (3) or waves (1) and (3) combined would give an expected top of 271 or 337, respectively. Based upon the minor degree counts as shown in the Figure (in pink), then wave 5 should top out around 235-240. I am assuming we are in wave 4.(5) right now. However, if we do not come close to breaking the lower trendline in the next week or two, then wave 3 is still intact. Whenever situations arise where multiple counts are available, the pattern is usually at half way, or slightly beyond. The confidence in this count I am placing at around 80% right now, but notice the alternate count shown in gray. It is possible that a terminal impulse completed the pattern on Friday, but again, confirmation is so important before any conclusions can be drawn. There is a possibility of 1-2 weeks of sideways action in the HUI before wave 4 completes prior to the final move up. We still could have the HUI run until December, but that depends a lot on how the market behaves. I am looking for wave 5 to develop, which would have 4-6 weeks in duration. Figure 6 shows the proposed longer term projection of the HUI, based upon the current wave being extended in the pattern (we need the HUI to get to around 245 or so to consider this pattern valid). The wave [2] that develops could be a running correction i.e. above the termination point of wave [1]. If true, the best play is to buy on the termination point of wave (W).[2] and ride the move up. The initial move down should be very sharp, followed by a violent three wave (zigzag, or 5-3-5) movement, then a triangular consolidation prior to the very strong up and coming wave [3]. Given the suppression in gold prices for twenty years, this pattern has a high probability of occurrence.

Figure 5. Elliott Wave Chart of the Gold BUGS Index (HUI).

Figure 6. Proposed path for the HUI this coming year.

US Dollar Index

How simple: DOWN. Figure 7 shows the USD index on a weekly time frame. Lower BB's are signaling more downside and the upper BB's have a long way to go before the ribbon pattern is complete. The full stochastics have based, and are rolling over now. Figure 8 shows the daily pattern for the USD Index with BB's and full stochastics. The pattern will continue to follow the 1x1 line as it progresses lower. The upper BB's are getting set to form another ribbon, and the lower BB's are perfectly set up to head lower now. USD is set up for a sharp decline. The full stochastics crossed over with brute force last week. The sharp slope down matches that of the decline thus far.

Figure 7. Weekly chart of the USD index with Bollinger Bands and Full Stochastics set to 55,21,34.

Figure 8. Daily chart of the USD index with Bollinger Bands and Full Stochastics set to 55,21,34.

The Elliott wave count shown in Figure 9 is simple, DOWN DOWN DOWN. There is uncertainty where to place wave (2), as shown with the alternate count in gray. I set wave (2) as a running correction to indicate the severity of the downside coming up. Such a high degree was used for labeling this decline, as the labeling scheme is to fit with the higher degree count. The USD is likely to go to 89-90 before bottoming. Examine the stocks and you can see how rapid the pattern degraded. This usually spells for a very sharp decline such as what we are seeing. The anticipated bottoming of this wave is mid-November. Until more of the pattern presents itself, the labeling is good. Also, pending how the pattern develops the counts may have to be lowered one degree.

Figure 9. Elliott wave chart of the US dollar Index.

S&P 500 Index

Figure 10 shows the S&P 500 weekly chart with BB's and full stochastics. The BB's are indecisive at this level currently, but suggest stalling in the decline coming, which should help keep the S&P above 800. The full stochastics have a long while to go prior to crossing over. Figure 11 shows the daily S&P chart with BB's and full stochastics. The upper BB's have not moved above the wave structure to indicate a consolidation or top yet. The lower BB's are inconclusive, and the stocs have reversed to show an extension with no crossover yet in sight. Figure 12 shows the S&P with moving averages and MACD. The 50-day MA is still over the 200 day MA, and the MACD is slowly trending upwards. The lines drawn in are just a template for putting together chunks for the larger degree count.

Figure 10. Weekly S&P 500 chart with Bollinger Bands and full stochastics.

Figure 11. Daily S&P 500 chart with Bollinger Bands and full stochastics.

Figure 12. Daily S&P 500 chart with moving averages and MACD.

The Elliott wave count of the S&P is shown in Figure 13.

The pattern advance since early August is shown to get a clearer picture of the top formation. The wave pattern is on track to 1060 currently in wave (v). Wave (v) should be nearly equivalent to wave (I) so it should be a 25-30 point advance. Should the wave pattern go beyond 1070, then the likelihood increases that wave (v) labeling will have to be lowered one degree and an advance up to 1100-1150 is in the cards. Currently, the best case scenario until proven otherwise is 1060. The decline to follow should last four monthish, or January-March 2004 pending on how the pattern develops at hitting the target of 790-830. The rise to follow should go to near 1200, and complete the larger degree pattern around August 2004. A large decline in all indices should occur in late 2004 into 2006.

Have a good week,

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