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Amex Gold Miners Index Review

By: CAPTAINHOOK


-- Posted Wednesday, 29 December 2004 | Digg This ArticleDigg It!

 

The study below appeared on http://www.treasurechests.info/index.php (Treasure Chests = Button) for the benefit of subscribers on Thursday, December 23rd this past week.

 

A detailed review of the Amex Gold Miners Index (GDM) is provided for your consideration. In addition to analysis of daily, weekly, and monthly charts, key inter-market relationships are included to round out the picture. Currently the GDM is at a critical ‘pivot point’. Thus, proper interpretation of the charts has never been more important in our opinion, as whichever way prices break over the next few weeks will provide important clues as to what can be expected in 2005. Let’s take a look.

 

Is the relative weakness in precious metals shares against the commodities about end? Based on the general disposition of select charts reflecting conditions in the  GDM, there is good reason to believe this is the case, at least for a while. As may know, when the paper representations of an underlying commodity begin to outperform on a sustained basis, this condition normally signals improving conditions for the sector lie ahead. When it comes to precious metals however, relative strength in shares could be signaling something much more profound economically, because gold and silver are much more than mere commodities. In particular, gold has been a primary means of both wealth exchange and preservation for thousands of years, where changes in its value signals periods of economic turmoil.

 

This statement may not make sense in the context that on the surface, as equity markets are strong right now, general economic conditions in the world appear to be quite healthy. But, one must remember, markets are future discounting mechanisms. So, if gold and silver shares begin to outperform in earnest presently, which of course would be accompanied by the metals to a lesser relative degree, would such circumstances be signaling trouble lies ahead for the economy? Further to this query, would this condition be signaling the need for  accelerated currency debasement agendas on the part of a growing number of Central authorities around the world? We think the answer to both of the above questions is a resounding ‘yes’, and that a break higher in the ‘yield curve’, especially if the inversion becomes pronounced, will signal the ‘need for speed’ as it pertains to global printing presses. Knowledgeable experts see an inverted ‘yield curve’ as the most reliable indicator of an impending recession, which means the chart below should give one cause for concern in this regard, along with reinforcing an optimistic view for precious metals in the coming months. (See Figure 1)

 

 

Further to this, if it’s true consumers provide the impetus for a full two-thirds of US economic activity, and a goodly percentage globally, the appearance of the same technical formation that characterized a Dow top in 2000 on the Morgan Stanley Consumer Index (CMR) suggests rate spreads may in fact be sending an accurate signal. We find it difficult to imagine the Fed being able to maintain its current policy stance much longer if events begin cascading in a negative fashion, consistent with the view ‘money’ should become ‘easier’ in 2005. (See Figure 2)

 

 

Anyone who has been an investor in precious metals shares throughout 2004 has certainly had their patience skills sharpened, because the underlying commodities, as with the broader measures, experienced a period of relative buoyancy, creating much confusion amongst many market participants. The reason for this occurrence was due to ‘price inflation’ catching up to the ‘currency inflation’ that preceded it, where the rising costs associated with the former crimped profit prospects for producers. Does this mean if shares begin to outperform moving forward the market sees a period of accelerating currency debasement agendas on the part of Central authorities in 2005? In our opinion, you can bet your ‘bottom dollar’ on such an outcome, and what may be different this time around in relation to earlier episodes, is that a growing number of locales may jump on the bandwagon along with the US. Such an occurrence should involve technical breakouts in a growing number of locally priced gold and silver charts, providing a supportive tone for meaningful gains across the sector next year. (See Figure 3)

 

 

With this backdrop, we will now begin our review of technical conditions found in the GDM at present, with the objective of discerning clues as to proper expectations for the New Year. As you will glean by the conclusion of this exercise, one should be far more optimistic than not regarding prospects for 2005, where as usual in advance sequences, shares will likely resolve in an accelerated bullish fashion well before the metals at some point due to reasons mentioned above, and more. Here is a 10-year view of a daily plot that shows some additional downside potential to channel, moving average, and indicator support extremes currently exists, but that the balance of risk appears to be on the upside given the measured move (MM) provided. (See Figure 4)

 

 

When put against gold, providing a relative valuation to the above, one should notice this relatively broad measure of the sector is now into proximity to bull defining support amongst a predominance of the indictors, moving averages, and from a structural perspective, where it would not take much more price erosion from current levels to match the extreme oversold readings registered back in May of this year. Based on a preponderance of the evidence, any further weakness in precious metals shares should be limited to approximately ten percent at the extreme, and the move lower should be grinding and corrective in nature. As it pertains to the general structural integrity found in the chart panels both above and below, it should be realized the long-term nature of the formations suggests supports should hold during the present corrective sequence. Furthermore, when one combines the presence of massive ‘inverse head and shoulders patterns’ (IH&S’s) with ‘diamonds’ in a plethora of the indicators, evidencing a compression build, we can only conclude the MM’s provided are realistic in terms probabilities. (See Figure 5)

 

 

Isolating a time frame to the new millennium, and counter to the more bullish disposition found in the dailies above, the messages present in the weekly charts suggest that although the ultimate outcome should be positive, as volatility is contracting during the consolidation now, more meaningful downside may be in the cards. Such an occurrence would represent a loss of momentum, where although downside would likely be limited to the proximity of May lows if things get out of hand (i.e. a larger degree ‘flat’ in Elliott Wave Theory terms), the move would take months to complete. This does not match a popular view amongst speculators thinking in terms of a more bullish outcome in January once tax-loss selling subsides, which is why it may happen. First things first however, in order for a more bearish outcome to prevail, prices will have to plunge through 'inverse head and shoulders pattern' support indicated on the weekly GDM chart shown below. (See Figure 6)

 

 

Further to this, it should be noted the Relative Strength Indictor (RSI) above is not so far away from 50, the bull defining metric, that a ‘pivot’ back through the mark is not impossible at this point given what we know about other technical considerations, fundamentals, and inter-market relationships. While it’s true the oscillators posses an ominous appearance at present, one suggesting potentially months of further consolidation, could it be the above might be better compared to a ‘bad painting’, rather than a true reflection of dynamics within the internals? For example, in monitoring options distributions for the February Gold Contract on Comex over the past few weeks, we have noticed speculators are becoming increasing bearish, which is of course bullish as consensus in this group is normally a reliable contrary indicator. In fact, you may be pleased to know that on an options related basis a floor has been put in at $430, which you may remember from previous discussions is now daunting support given this mark was formidable ‘double top’ resistance on the way up. In addition to this knowledge, we also find it comforting to know that Commercial interests are becoming more bullish on the prospects for gold, and that with the big correction in open interest last week, much room exists for new buying at present. Based on this frame of reference, we would not be surprised to see a ‘snap’ higher sooner than later, negating the bearish undertones present in the weeklies as it stands today. (See Figure 7)

 

 

Of course if this does not transpire, we may have to ride out the storm for a few more weeks or months, but it should be remembered we are fast approaching a Fibonacci 38 percent ‘time requirement’ for the larger degree correction at the end of February. And although this process could obviously run longer, with the 50 percent ‘signatured’ mark in June, and ‘golden retrace’ in October, it should be noted we are currently well within the ‘minimal’ window in this regard, and that the second ‘primary’ advance of this secular bull market in precious metals shares could commence at anytime. This opinion is substantially fortified in the knowledge speculators have gone increasingly bearish on the prospects for precious metals shares over the past few months, as expressed by the growing short interest in the trade. And although a 10-year GDM monthly chart shows the same near-term bearish potential found in the weekly, it should be noted that again, serious indicator related support is not far away, and that for example, RSI is holding above 50, which is significant horizontal support. (See Figure 8)

 

 

Indicators in the above have been sensitized to more near-term Fibonacci related settings with the objective of both shedding an appropriate light on likely intermediate-term ‘swing’ signals for the sector, along with providing us with a view not everybody else is looking at using ‘standardized’ metrics. Particular attention should be paid to the MACD in this case, as a sloppy interpretation of what appears to be a ‘head and shoulders pattern’ could be construed based on its overall structure. It should be noted however that by definition, true formations such as this are characterized by the right shoulder residing below the left, which is not the case in the above. Further, and just like in the weekly, significant indicator support is close at hand with the exception of stochastic influences, which have turned higher anyway. Quite frankly, we would not be a bit surprised to see prices turn higher quite soon based on a preponderance of the more subtle observations concerning the monthly plot, especially as it pertains to messages within the view when put against gold. (See Figure 9)

 

 

As you can see above, and illuminating the reason we are characterizing the current technical setup as a potential ‘pivot’, one can see that some significant long-term formations have been traced out though the years, culminating into a possible bullish outcome moving forward from this point. Perhaps the best news is that even if events unfold in a more bearish fashion over the coming months, the worst case scenario we can envision based on the above is a relatively slow and grinding trade lower until secular scale fundamentals take hold. Never the less however, a meaningful break lower in Bollinger Band Widths (BB’s) and the Aroon would indicate that a more significant corrective sequence should be expected beyond what has been experienced to date, and that a trip down to retest the May bottom would not be surprising, if not probable based on magnitudes of the breaks that may occur.

 

But, if those ‘diamonds’ in the indicators resolve in a bullish fashion as we move into next month, where bearish speculators will be forced to adjust their views, the move higher could be breath taking, and expensive for the shorts, who are growing in numbers by the day. Certainly with the Dollar recently vexing 80, which may prove to be formidable support considering a period of seasonal strength is upon us, and speculators are still massively  short, a more prolonged correction may be store. Interestingly, you should know the same Commitment Of Traders (COT) structural condition is not the case when it comes to gold compared to currencies however, as speculators, doing what they do worst, have already somewhat anticipated much of a Dollar rally into the trade, leaving room for a surprise with all that liquidity floating around out there.

 

With a good part of the post-election rally in stocks behind us, along with much of the economic benefits, not the least of which includes politically motivated tax-legislation, a well founded argument can be made Gross Domestic Product (GDP) will falter in the US next year, with many looking for a ‘hard landing’ in China and other developing locales being the result. Such thoughts bring questions regarding general liquidity and debt conditions, and whether secular influences will overcome official countermeasures in the mix, potentially causing a rout in equities to develop, including commodities on a temporary basis. No doubt all things paper would feel the pinch under such circumstances, and as you know from our recent observations concerning the textbook structural appearance of a legitimate ‘head and shoulders pattern’ in the Amex Gold Bugs Index (HUI) / Amex Oil Index (XOI) Ratio, perhaps more risk as it pertains to what other indicators are showing us exists in commodity based stocks at this time; and, that 2005 could turn out to be one ugly year if the aforementioned chart were to release on the downside. Not surprisingly, the picture is not much different when the GDM is put against the XOI. But, as you can see below, and perhaps due to the fact we are working with a broader measure here, structural integrity of the pattern is far more suspect than the aforementioned. Furthermore, and as with the count in the HUI / XOI Ratio, from an Elliott perspective an ultimately bearish outcome is not possible past what would be seen as a ‘truncated double zigzag’ extending down to ‘golden retracement’ support. As you may or may not know, ‘head and shoulders patterns’ are notoriously unreliable structures, often for reasons related to the count shown below.  (See Figure 10)

 

 

With the above right on ‘bear flag’ support, and previous weakness indicative of the same in the sector, we should find out shortly how trade will resolve with a break below current levels, if this is indeed what occurs. As mentioned several times now, and evidenced in Figure 9, we are currently at an important ‘pivot point’ in the precious metals sector. Thus, if prices break lower this coming week, such an occurrence would be indicative of further meaningful weakness dead ahead, but only to the extent of standard Fibonacci time and price retracements. And because we currently reside at such an important juncture, you can rest assured we will be back in force next week with further insights concerning the above, along with some new ones recently gleaned, that fortify our views 2005 should resolve in ‘golden fashion’ ultimately irrespective of a potentially shaky start. Remember, next year will mark the corrective low for precious metals shares by no later than October. When they begin to outperform on a sustained basis once again, you will know another 'primary' advance sequence lasting somewhere between five to seven years lies ahead before an episode like the one endured in 2004 will be experienced. The 'big question' on everybody's mind right now is from what levels?

 

Evidenced above is the growing complexity associated with investing in today’s markets, where it is our belief a solid marriage between both fundamental knowledge and proficient technical analysis is key to enhancing returns for investors, even secular bull markets, like that in precious metals at present. Many lessons have been learned by gold bugs in 2004, not the least of which is identifying and owning good ‘value’ in one’s portfolio can smooth out the ride during cyclically based corrections. Further to this, trading a percentage of one’s holdings based on proven technical methodologies at intermediate-term ‘swing points’ can also prove constructive in enhancing portfolio growth, adding to the benefits of holding a strong ‘value based core’. Trading is not for everyone, and we do not profess to be ‘the answer’ regarding any frustration you may have in accomplishing your investment goals. However, as you can see in the generalized example of our work above, every effort is made to aid those who seek our help, both sophisticated and novice. So, if you are interested in both smoothing out and enhancing your portfolio returns in 2005, and beyond, give our Treasure Chests a visit where you will find subscription information. I can assure you, if you are so inclined, one will not regret this decision.

 

Happy holidays all.

 

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at Treasure Chests.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

Copyright © 2004 treasurechests.info Inc.  All rights reserved.

Unless otherwise indicated, all materials on these pages are copyrighted by treasurechests.info Inc. No part of these pages, either text or image may be used for any purpose other than personal use. Therefore, reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission. 


-- Posted Wednesday, 29 December 2004 | Digg This Article




 



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