• Mark Hulbert of the Hulbert Financial Digest recently reported that gold timers are the most bearish they've been since 1997! Tell me that isn't great news. A few months ago near the 11-17-04 major (intermediate term cycle) high gold timer bullishness was rampant. Now, after a major (intermediate term cycle) low on 1-6-05 probably occurred gold timers are generally very bearish. Gold stocks have a very solid wall of worry to climb, at least in terms of advisor sentiment.
  

• XAU Implied Volatility at 25.03 (at 28.50 on 11-19-04) and the XAU Put/Call Ratio at 0.66299 on 1-14-05 (at 0.80270 on 11-19-04) have collapsed recently, despite the collapse in the XAU since 11-17-04, which has correctly portended weakness. They (the XAU wall of worry) should begin to rise or at least hold up well relative to the XAU (fall less in percentage terms than the XAU rises or rise more in percentage terms than the XAU falls).
  

• The latest Commitments of Traders (COT) data (as of 1-11-05) reveals that dramatic repositioning continues to occur. As they did the week before last, the reliable non contrarian gold Commercial Traders covered an unusually large (> 10% of the short contracts) 32,419 short futures and options contracts. The notoriously contrarian gold Speculators sold an unusually large (> 10% of the long contracts) 31,419 long futures and options contracts. A big difference this week is the gold Commercial Traders are looking for significant strength in gold (and silver) this week, because they added 5421 long futures and options contracts last week versus only 825 the week before, when they correctly expected modest strength. There were similar large changes in silver and the US Dollar, with all the details near the bottom of this update.
  

• The Commitments of Traders (COT) data as of 1-4-05 revealed that dramatic repositioning occurred . The reliable non contrarian gold Commercial Traders covered an unusually large (> 10% of the short contracts) 35,004 short futures and options contracts, the notoriously contrarian gold Speculators sold an unusually large (> 10% of the long contracts) 30,018 long futures and options contracts, and there were similar large changes in silver and the US Dollar, except for the silver Speculators. 

• As one can see in gold's latest chart, it's long term upcycle trendline remains intact. Gold could fall to about $413/ounce, so most if not all of the major correction should be behind it. Gold's biggest percentage decline occurred since late December whereas gold stocks biggest percentage decline occurred before the December 8, 2004 short term cycle low, which is another example of the metal lagging the stocks.

• The next 6 months or more, following the major bottom that probably occurred on 1-6-05, should be the sharply rising segment of the long term upcycle that began on 5-10-04, similar to the April 2003 to December 2003/January 2004 timeframe in the previous long term upcycle for HUI, NEM, and the XAU. Please see the 5 year NEM chart dated 1-7-05 which shows that NEM is near the bottom of it's very long term upcycle/Bull Market channel (the last bar should be closer to the bottom than it's shown since NEM's low was 41.38 on 1-7-05), is oversold, and it's long term upcycle should soon "go parabolic" in similar fashion to what occurred in the prior 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), based on well established cyclic behavior (see 4-5 year charts).

• Before I thought 12-8-04 was a major bottom my intermediate term cycle low targets for HUI and the XAU were 190-200 and 90-95 based on their long term upcycle trendlines, as discussed in my first update in December 2004. HUI and the XAU appear to be bottoming near their long term upcycle trendlines (see latest charts), so the target ranges were probably good ones and cycles will probably prove to be an effective market timing tool as usual. The most important consideration in timing any market is the cycle channels/trendlines.

• Going back to the prior long term upcycle for NEM that began on 7-26-02 (see 5 year chart dated 1-7-05) one can see that NEM was relatively flat in the second half of 2002 and in early 2003, yet HUI still rose about 170% in it's long term upcycle from 7-26-02 until 12-2-03. HUI, NEM, and the XAU were relatively flat during the first 8 months of their prior long term upcycle (from 7-26-02 until the end of March 2003), as can be seen in their 4 and 5 year charts. In April of 2003 the prior long term upcycle went parabolic (the rate of ascent increased dramatically), which is what I think will happen after this major intermediate term cycle low. HUI, NEM, and the XAU are likely to enter the steep part of their long term upcycle curves, once (or if) the major bottom is in.

• NEM has an upside gap to fill just below 44.50.
  

• I've created a Joe F. Rocks imaginary mutual fund at Marketocracy that will trade gold/silver stocks and maybe also precious metals via Exchange Traded Funds (ETF) like GLD (new gold ETF) using my "Trade the Cycles" system. The Fund Manager name should say Joe Ferrazzano not  "joefrocks." I bought "en masse" on 1-5-05 and was more than 90% invested on that date, so I got in shortly before HUI hit a potential major bottom very early on 1-6-05. This will be a way of establishing an independently calculated track record. The fund is down 0.80% (up 1.43% from 9.78 last Friday 1-7-05), with a fund share price/NAV at 9.92 on 1-14-05 versus 10.00 at it's inception on 1-5-05. I'll track it's performance weekly in these updates, but the link above updates the fund share price/NAV the day after each session I believe. My current holdings are ABX (Barrick Gold), AGT (Apollo Gold), CDE (Coeur D' Alene, mostly silver), DEZ (Desert Sun, mostly gold), FCX (Freeport McMoran, gold/copper), HL (Hecla Mining, a gold/silver mix but silver at heart), GG (Goldcorp, mostly gold), GLG (Glamis Gold), GSS (Golden Star, mostly gold), MDG (Meridian, mostly gold), NEM (Newmont Mining, mostly gold), NG (Novagold), NTO (Northern Orion, mostly gold), PAAS (Pan American Silver), SIL (Apex Silver), SSRI (Silver Standard Resources), and WTZ (Western Silver). 

• Please don't take these as recommendations, they're not. I'm in the business of providing market timing information and most of the money I make is from trading in my personal accounts (I don't have a subscription service, at least not yet). The Joe F. Rocks fund at Marketocracy will provide a great independently tracked way of assessing "Trade the Cycles" as well as my trading ability and you can compare me to other market timers. I think I have a great shot at being very near the top of Marketocracy's rankings in 6 months (when they'll first rank my fund), partly because of how great the gold/silver stock market is, but largely because of my "Trade the Cycles" system. Given how volatile gold/silver stocks are it would be easy to have a substandard rate of return relative to HUI and the XAU if one wasn't good at timing gold/silver stocks. I'll be doing mostly intermediate term cycle trading (cycles that last about 4-6 weeks from cycle low to the next cycle low) and some short term cycle trading. Once the long term cycle high occurs probably in about 6 months I'll be 35% in cash and will find low volatility stocks to park most of the rest of the fund. I have to be at least 65% invested, which ties my hands some, but I should still do very well. Margin and short selling aren't allowed by Marketocracy because they're following typical mutual fund guidelines. I could end up running a real mutual fund for them if I rank very high. Desert Sun (DEZ) wasn't identified as a mining firm by Marketocracy for some weird reason, thus the 1% other in the sector allocation.
  

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) five days a week, so near critical times especially, you may want to check it out. Also, you can see how I use the indicators in concert with cycles every day just above the "Current Assessment." Fascinating!
  

• The US Dollar (USD) is back in an intermediate term upcycle (see latest chart) as can be seen in the latest USD chart. The USD's intermediate term upcycle should be limited by it's very long term downcycle/Bear Market trendline currently a bit above 85.  

• An 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 will probably occur in this long term upcycle (that's likely to last another 6-12 months).
  

• A great reason why the US Dollar (USD) will probably continue to decline for years to come? The US is the only country to my knowledge that pays it's foreign debts in it's own currency. Therefore, by dramatically devaluing the USD, the US greatly reduces it's foreign debt load.
  

• 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. 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.
  

• 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.
  

• 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 "Trade the Cycles" 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 fell -2.70% to 25.030 on Friday 1-14 from 25.725 on 1-13 versus a -0.92% decline in the XAU on 1-14, which is a very sharp (3-6%) 3.62% rise in complacency (-2.70% + -0.92% = -3.62%. The XAU wall of worry shrank by 3.62%, therefore complacency  rose by 3.62%) that portends weakness/a downtrend on Tuesday 1-18 (complacency is usually contrarian and therefore normally portends weakness, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That weakness/downtrend could follow a gap up. XAU Implied Volatility 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. 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 0.66299 for the January expiration as of 1-14. The XAU Put/Call Ratio was at 0.79348 for the final December expiration as of 12-17-04. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19-04. 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 Tuesday 1-18 is the fact that NEM outperformed the XAU since 1-6-05, which is a good sign: 1-14 NEM -0.99% vs -0.92% for the XAU, 1-13 NEM -1.10% vs -0.95% for the XAU, 1-12 NEM +0.78% vs +0.01% for the XAU, 1-11 NEM +1.87% vs +0.91% for the XAU, 1-10 NEM +0.39% vs +0.81% for the XAU, 1-7 NEM -0.24% vs +0.41% for the XAU, 1-6 NEM -0.17% vs -0.35% for the XAU.                     

• There's an early warning system in place! The NEM Lead Indicator chart dated 1-14-05 below (first chart) reveals that NEM is outperforming, which portends strength this week. The NEM Lead Indicator chart dated 1-14-05 below (first chart) reveals that NEM underperformed until Monday 1-10, correctly portending weakness late last week. 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 1-14 (-94% on 1-7) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -71% on 1-14 (-73% on 1-7) 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 reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness with only 127,065 long futures and options contracts versus 235,117 short futures and options contracts (data as of 1-11-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 110,457 long futures and options contracts versus only 39,289 short futures and options contracts (data as of 1-11-05).

• The gold Commercial Traders added a large 5421 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 32,419 short futures and options contracts which portends strength this week (non contrarian indicator), but the unusually large degree of short covering points to some weakness (contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below) and keep in mind that the data is as of 1-11-05 for all the COT data in this update, so the data is somewhat stale (for short term cycle trading) by the time it's analyzed, but is highly useful nonetheless, especially for intermediate term cycle trading.

• The gold Speculators (hedge funds and other speculators/traders) sold an unusually large (> 10% of the long contracts) 31,419 long futures and options contracts and added 7706 short futures and options contracts which portends strength this (contrarian indicator), but the unusually large degree of long liquidation points 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 23,294 long futures and options contracts versus 80,381 short futures and options contracts as of 1-11-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 42,102 long futures and options contracts versus only 8622 short futures and options contracts as of 1-11-05.

• The silver Commercial Traders added 1197 long futures and options contracts and covered 2588 short futures and options contracts which portends strength (non contrarian indicator) this week. 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 639 long futures and options contracts and added an unusually large (> 10% of the short contracts) 4251 short futures and options contracts which portends strength this week (contrarian indicator), but the unusually large degree of shorting points 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 9518 long futures and options contracts versus only 4030 short futures and options contracts as of 1-11-05. Last week they sold an unusually large (> 10% of the long contracts) 3356 long futures and options contracts and added 1633 short futures and options contracts which portends USD weakness this week (non contrarian indicator), but the unusually large degree of long liquidation points to some strength (contrarian case). The week before last the USD Commercial Traders sold an unusually large (> 10% of the long contracts) 4626 long futures and options contracts. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
  

• The notoriously contrarian (in terms of their trading activity) USD Speculators are correctly positioned for US Dollar weakness with only 4524 long futures and options contracts versus 10,053 short futures and options contracts as of 1-11-05. Last week they sold 795 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 4447 short futures and options contracts which portends USD weakness this week (contrarian indicator), but the unusually large degree of short covering points to some strength (non contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts below). 

• 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.
  

Joe F. Rocks!

-- Posted Sunday, 16 January 2005 | Digg This Article