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

• In the 1 month charts (that show the intermediate term upcycle channels) one can see that the XAU put in a short term cycle low on 12-16, one day after it made a short term cycle high, while HUI put in a short term cycle low on 12-20 and NEM did so on 12-22. HUI, NEM, and the XAU should now leave the early flat part of their intermediate term upcycles, so the next few weeks should see sharp gains in gold/silver stocks. HUI, NEM, and the XAU spent the past week near the bottom of their intermediate term upcycle channels (see 1 month charts) and should rise toward the top of those channels in the next few weeks.
  

• An intermediate term cycle high typically occurs about 3-5 weeks after an intermediate term cycle low, so look for that in early to mid January. Only nimble traders should be trading short intermediate term cycles that typically last about 4-6 weeks, with usually a 3 to 5 week upcycle duration and a 1 to 2 week downcycle duration.

• In HUI's latest chart one can see that very strong support exists in the 214 area. HUI made 8 session lows in that area during the last few weeks which is unusual and probably bodes well for this intermediate term upcycle. The flat start to this intermediate term upcycle (began on 12-8-04) implies that this may be a long upcycle accompanied by above average gains.
  

• In the latest 1 month charts preliminary intermediate term cycle high target ranges can be derived for HUI, NEM, and the XAU based their intermediate term upcycle channels. For HUI an intermediate term cycle high target range is 230-240, for NEM an intermediate term cycle high target range is 48-50 (major resistance in the 50 area), for the XAU an intermediate term cycle high target range is 105-110. To determine the target ranges one has to extrapolate where the intermediate term upcycle channel tops will be in two weeks and consider that dramatic spike moves could result in breakouts above the channels. The target ranges might have to be revised upward next week.

• If reliable lead indicator NEM can break through major resistance in the 50 area in this intermediate term upcycle, then this could turn out to be a major intermediate term upcycle, but I suspect NEM won't break through major resistance in the 50 area until the next intermediate term upcycle.
  

• Keep in mind the intermediate term cycle highs for HUI, NEM, and the XAU that are likely to occur in the next few weeks almost certainly won't be an important multi-month top, so unless you're a nimble trader, simply holding makes the most sense. As discussed last week, the intermediate term cycle lows on 12-8-04 (occurred at 207.77 for HUI, at 43.00 for NEM, and at 95.93 for the XAU) were probably a major bottom.
  

• If you are trying to pick a top, look for a 4 to 8% (possibly more) spike move during the last few days of this intermediate term upcycle, and, look for volume to expand near the intermediate term cycle high. NEM might have a session with 6 to 8 million shares traded near the top.
  

• The reliable approach for trading short intermediate term upcycles (typically last 3 to 4 weeks) is to sell after a parabolic trendline intermediate term cycle sell signal and hopefully before a straight trendline intermediate term cycle sell signal. Intermediate term upcycle trendlines usually become increasingly parabolic/sharply risng for a few weeks, which forms what I call a parabolic intermediate term upcycle trendline, that consists of a few segments of ever increasing strength. Once that parabolic intermediate term upcycle trendline breaks down, a sell window opens for the intermediate term upcycle, and one should finish selling prior to the straight trendline intermediate term cycle sell signal. One needs to practice this "Trade the Cycles" system enough in order to become proficient at it.
  

• The long term upcycles for HUI and the XAU have increased in strength, as can be seen in the latest charts. The increase in strength for HUI's long term upcycle is more pronounced than for the NEM dominated XAU because it's not market cap weighted. The next 6 to 12 months should be the sharply rising segment of HUI/XAU's long term upcycle that began on 5-10-04, which should be an outstanding time for gold/silver stocks.
  

• Parabolic and straight trendline intermediate term cycle buy signals have occurred for HUI, NEM, and the XAU (see 1 month charts dated 12-17-04). The straight trendline buy signals confirm that major intermediate term cycle lows occurred at 207.77 for HUI, at 43.00 for NEM, and at 95.93 for the XAU on 12-8-04 and that intermediate term cycle buy signals are in effect for HUI, NEM, and the XAU.
  

• Assuming that this long term upcycle has about 6-12 months to go (will last about as long as the previous one did, from 7-26-02 till 12-2-03 for HUI/NEM and till 1-6-04 for the XAU), which is a safe assumption due to the healthy major correction from 11-17-04 until 12-8-04  (HUI corrected 16% and NEM/XAU about 14%) that probably breathed new life into the long term upcycle, HUI/XAU are now probably in the parabolic/sharply rising segment of their long term upcycle. This means that the next 6-12 months should be even better than the previous 6 months, and probably dramatically better. Long term cycle highs well above the previous ones should occur (at 258.60 for HUI on 12-2-03, at 50.28 for NEM on 12-2-03, and at 113.41 for the XAU on 1-6-04).

• Keep in mind that very long term upcycles (secular Bull market in gold/silver stocks) began in October 2000 for NEM/XAU and in November 2000 for HUI. There are very long term cycle charts below with HUI's dated 12-17-04 and the XAU's dated 10-20-04 being more recent than NEM's. An important development portending increased strength in gold/silver stocks is the fact that the very long term upcycle trendlines for HUI and the XAU are now in a sharper uptrend than they were during the first couple of years of this gold/silver stock Bull Market (see 5 year HUI chart dated 12-17-04 and the 5 year XAU chart dated 10-20-04). Gold began a very long term upcycle in April 2001 and silver did in November 2001.
  

• The Commitments of Traders (COT) data as of 12-14-04 for both gold and silver reveals dramatic repositioning on the part of both the non contrarian gold/silver Commercial Traders and the contrarian gold/silver Speculators, which indicates that both gold and silver may have bottomed. The non contrarian gold Commercial Traders added a substantial 12,197 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 34,863 short futures and options contracts while the contrarian gold Speculators sold an unusually large (> 10% of the long contracts) 51,913 long futures and options contracts but did cover (what for them is) an unusually large (> 10% of the short contracts) 6597 short futures and options contracts. A similar story exists for silver.
  

• Gold's long term upcycle trendline appears to have turned up and increased in strength, assuming it's bottomed. Gold has a sharply rising uptrendline since early September that appears to be the new long term upcycle trendline. I say appears to be because there's a chance that gold is lagging gold stocks as they recently did when they peaked in early December versus gold stocks peaking on 11-17-04.
  

• The recent weakness made sense based upon the major bottom/intermediate term cycle lows that occurred on 12-8-04. Cycle rising bottoms uptrendlines usually start out fairly flat, so, after a strong rally/short term upcycle that led to intermediate term cycle buy signals for HUI/NEM/XAU, they declined sharply and their rising bottoms intermediate term upcycle trendlines have become fairly flat which is typical cyclic behavior.

• The US Dollar (USD) hit an intermediate term cycle buy signal on 12-10-04 (see latest chart). It broke above it's intermediate term downcycle trendline on 12-9 and sufficient follow through confirmed a buy signal on 12-10.
  

• An important factor to keep in mind is NEM's major resistance in the 50 area. NEM put in a double top (long term cycle high) at 50.28 on 12-2-03 and at 50.04 on 1-6-04 and recently put in a major top at 49.98 on 11-17-04. Therefore, nimble traders may get some opportunities when NEM attempts to break through major resistance in the 50 area. Since NEM is a reliable lead indicator, a clear failure to break above 50 will be a good signal to look to take short term cycle profits and maybe sell short a bit.
  

• Another important factor is the fact that the US Dollar's very long term downcycle trendline (see chart) is converging with major support in the 80 area, so a major breakdown in the USD is likely in the not too distant future and may occur in this long term upcycle (that's likely to last another 6-12 months).
  

• HUI fell about 16% from 248.18 on 11-17-04 to 207.77 on 12-8-04 and the XAU fell about 14% from 111.50 on 11-17-04 to 95.93 on 12-8-04. NEM fell nearly 14% in the intermediate term downcycle (intermediate term cycle high at 49.98 on 11-17-04 to intermediate term cycle low at 43 on 12-8-04). So, while the long intermediate term upcycle lasted nearly 4 months, having begun in late July, the intermediate term downcycle lasted only 3 weeks for NEM, which isn't unusual. The down portion of a cycle, or downcycle, tends to be much shorter in duration than the preceding upcycle if the next longer cycle is heading up (long term upcycle is in place since May 10, 2004 for HUI/NEM/XAU as can be seen in the charts).
  

• Buy and hold for most investors/traders (until the long term cycle high in probably about 6-12 months) makes a lot of sense unless you're a nimble trader. Nimble traders have a good chance (using my system) of increasing returns by trading intermediate term cycles that typically last 1 to 3 months for an entire cycle up and down. Most traders/investors are much better off buying and holding long term upcycles.
  

• XAU Implied Volatility rose +3.34% to 27.395 on Thursday 12-23 from 26.510 on 12-22 versus a +0.18% rise in the XAU on 12-23, which is a very sharp (3-6%) 3.52% rise in fear (+3.34% + +0.18% = +3.52%. The XAU wall of worry grew by 3.52%, therefore fear  rose by 3.52%) that portends strength/an uptrend on Monday 12-27 (fear is usually contrarian and therefore normally portends strength, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That strength/uptrend could follow a gap down as discussed in previous updates (I left the discussion in toward the bottom). I've noticed that XAU Implied Volatility usually factors in during the first few hours of a session, but cycle channels/trendlines are the most important consideration. It tends to indicate a trend/tone rather than necessarily up or down for that session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. If XAU Implied Volatility indicates strength and the XAU Put/Call Ratio portends weakness typically strength followed by weakness will occur but these indicators must be used in concert with cycle channels/trendlines (very long term, long term, intermediate term, and short term).

• The XAU Put/Call Ratio is at 0.70549 for the January expiration as of 12-23. The XAU Put/Call Ratio is at 0.79348 for the final December expiration as of 12-17. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19. The XAU Put/Call Ratio was at 0.85989 for the final October expiration value as of 10-15. If it rises 6% or less it portends strength following likely early weakness (indicated by XAU Implied Volatility). If it falls 6% or less it portends weakness. At unusually large greater than 6% moves the XAU Put/Call Ratio becomes non contrarian, so a greater than 6% rise portends weakness (unusually large rise in fear) and a greater than 6% decline portends strength (unusually large rise in complacency).
  

• A major indicator (NEM Lead Indicator) portending strength (but all indicators and cycle channels/trendlines must be considered collectively, not in isolation. Think "system.") in the XAU on Monday 12-27 is the fact that NEM outperformed the XAU during 10 of the past 16 sessions, which is a good sign: 12-23 NEM +0.54% vs +0.18% for the XAU, 12-22 NEM -1.58% vs -0.87% for the XAU, 12-21 NEM +1.20% vs +1.25% for the XAU, 12-20 NEM +0.58% vs +0.44% for the XAU, 12-17 NEM -0.38% vs +0.07% for the XAU, 12-16 NEM -2.03% vs -1.74% for the XAU, 12-15 NEM +0.18% vs +0.86% for the XAU, 12-14 NEM +0.26% vs -0.65% for the XAU, 12-13 NEM +2.18% vs +1.51% for the XAU, 12-10 NEM -0.82% vs -0.93% for the XAU, 12-9 NEM +0.42% vs +0.45% for the XAU, 12-8 NEM -1.21% vs -1.45% for the XAU, 12-7 NEM -1.39% vs -2.10% for the XAU, 12-6 NEM -0.93% vs -1.40% for the XAU, 12-3 NEM +1.11% vs +0.62% for the XAU, 12-2 NEM -2.76% vs -3.28% for the XAU.

• There's an early warning system in place! The NEM lead indicator chart dated 12-23-04 below (first chart) reveals that NEM has outperformed recently as can be seen in the narrowing gap between NEM and HUI/XAU. When NEM underperforms HUI/the XAU for a few months then the long term upcycle that began on 5-10-04 will probably be in trouble, as was the case during the last few months of the prior long term upcycle that ended on December 2, 2003 (HUI/NEM)/January 6, 2004 (the XAU) and began on July 26, 2002. 
  

• The negative correlation between gold and the USD is now very high. It's -93% on 12-23 (-91% on 12-17) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -66% on 12-23 (-63% on 12-17) for the past 180 days. Silver's negative correlation is much less than gold's because it's more of an industrial metal than gold is, hence it has a more positive correlation with US economic strength and a strong US Dollar.

• The Commitments of Traders (COT) data wasn't available last week due to the Christmas holiday.
  

• The reliable non contrarian (in terms of their trading activity) gold commercial traders are short gold. They are clearly positioned for gold weakness with only 119,095 long futures and options contracts versus 285,365 short futures and options contracts (data as of 12-14-04).
  

• The notoriously contrarian (in terms of their trading activity) gold speculators are correctly positioned for gold strength with 160,102 long futures and options contracts versus only 32,177 short futures and options contracts (data as of 12-14-04).

• The gold commercial traders added 12,197 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 34,863 short futures and options contracts which portended strength last week (non contrarian indicator), but the unusually large degree of short covering pointed to some weakness (contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The gold speculators (hedge funds and other speculators/traders) sold an unusually large (> 10% of the long contracts) 51,913 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 6597 short futures and options contracts which portended strength last week (contrarian indicator), but the unusually large degree of long liquidation pointed to some weakness (non contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below). 

• The reliable non contrarian (in terms of their trading activity) silver commercial traders are short silver. They are clearly positioned for silver weakness with only 23,402 long futures and options contracts versus 93,832 short futures and options contracts as of 12-14-04.

• The notoriously contrarian (in terms of their trading activity) silver speculators are correctly positioned for silver strength with 47,582 long futures and options contracts versus only 2812 short futures and options contracts as of 12-14-04.

• The silver commercial traders added an unusually large (> 10% of the long contracts) 2737 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 21,907 short futures and options contracts which portended strength (non contrarian indicator) last week, but the unusually large degree of short covering pointed to some weakness (contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The silver speculators (hedge funds and other speculators/traders) sold an unusually large (> 10% of the long contracts) 27,646 long futures and options contracts and added 242 short futures and options contracts which portended strength last week (contrarian indicator), but the unusually large degree of long liquidation pointed to some weakness (non contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The reliable non contrarian (in terms of their trading activity) USD commercial traders are clearly positioned for US Dollar strength with 15,534 long futures contracts versus only 760 short futures contracts as of 12-14-04. Last week they sold 3932 long futures contracts and covered 170 short futures contracts which portends USD weakness this week (non contrarian indicator), but the most important consideration in timing any market is the cycle channels/trendlines (see charts below). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be contrarian (I'm not using/noting unusually large changes here).
  

• The notoriously contrarian (in terms of their trading activity) USD speculators are correctly positioned for US Dollar weakness with only 5354 long futures contracts versus 18,969 short futures contracts as of 12-14-04. Last week they sold 350 long futures contracts and covered 2367 short futures contracts which portends USD weakness this week (contrarian indicator), but the most important consideration in timing any market is the cycle channels/trendlines (see charts below). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be non contrarian (I'm not using/noting unusually large changes here).

• Detailed analysis regarding the important long term upcycle buy signal and other important "big picture" information as well as information about my system/indicators can be found at this link.
  

Happy trading, may the force be with you,

Joe F. Rocks!

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

Joe Ferrazzano is the Market Strategist for Joe F. Rocks! Growth Stock Investor & Market Strategist, http://www.JoeFRocks.com/ which was launched in September 2000.

Joe F. Rocks! is not a registered investment advisor. Investing in stocks involves risk. Joe F. Rocks! is not a registered broker or dealer. Each investor has to ascertain what percentage if any of one's investments should be allocated to growth stocks. Please see a financial planner, registered investment advisor or at least do your homework and decide what is right for your situation. Growth stocks tend to be extremely volatile which creates opportunities but also can be very painful and risky.

Each investor must take complete responsibility for his or her investing actions. Joe F. Rocks! should be considered as one source of information out of many from which to derive a decision on investing.

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