• The USD Commercial Traders correctly engaged in an unusually large degree of shorting near the USD's likely top/intermediate term cycle high, while the notoriously contrarian USD Speculators engaged in an unusually large degree of short covering near the high it appears.

• HUI, NEM, and the XAU staged impressive rallies after hitting lows near their Bull Market trendlines at 190.45 on 2-8 (HUI), at 40.07 on 2-9 (NEM), and at 87.60 on 2-8 (XAU). The impressive rally on high volume, combined with the fact that HUI, NEM, and the XAU fell to their Bull Market/very long term upcycle trendlines in place since late 2000, probably means that the lows are in or that only modestly lower lows will occur at worst.
  

• A test of the lows on 2-8 and 2-9 appears likely and is typical action near major bottoms anyway, because cycles tend to begin relatively flat. Lower lows this week or next wouldn't shock me, but, if I had to bet, I'd bet on the lows being in because HUI, NEM, and the XAU fell very close to their Bull Market trendlines on 2-8 and 2-9. The Commitments of Traders (COT) data in recent weeks is bullish for gold/silver on an intermediate term cycle basis (a few weeks/months) but portends some potentially substantial weakness this week.
  

• HUI, NEM, and the XAU fell very close to their Bull Market/very long term upcycle trendlines in place since late 2000 on 2-8 and 2-9. In HUI's 5 year chart dated 12-17-04 (last chart) one can see that HUI's Bull Market trendline is currently near 190, which suggests that it's low is probably in, or, if a lower low occurs, it should only be modestly lower than 190.45. So, a test of the lows this week should be a great buying opportunity.
  

• Spike moves, such as the dramatic rally following the lows two weeks ago, tend to be followed by precipitous declines, so please keep that in mind. It's not time to pop the Champagne by any stretch of the imagination. However, as I said previously, the major correction/intermediate term downcycle since 11-17-04 has been very similar in length and severity to the one that occurred in the previous long term upcycle just before it entered the steep part of it's long term upcycle and rose dramatically for nearly 9 months. The major correction has probably set up gold/silver stocks for a dramatic rally over the next six to nine months (the parabolic/sharply rising segment of the long term upcycle that began on 5-10-04 should begin if/once the lows are in).
  

• HUI and the XAU both rallied more than 5% after breaking their intermediate term downcycle trendlines (in place since 11-17-04, see 1 month charts dated 2-11-05), which is a major buy signal according to the new assumption my system uses for major buy signals, that would have weeded out the 12-8-04 and the 1-6-05 short term cycle lows, which easily could have been mistaken for major bottoms. HUI followed through by about 5.60% from it's breakout point and the XAU followed through by about 6.00% from it's breakout point, which are major buy signals. NEM only rallied about 2.00% from it's breakout point, which isn't a major buy signal. Please see their 1 month charts. Even if lower lows occurred, the Bull Market/very long term upcycle trendlines for HUI, NEM, and the XAU point to only  modestly lower lows worst case, as previously discussed. Also, the Commitments of Traders (COT) data, as discussed in recent updates, clearly supports a continuation of the gold/silver stock Bull Market.

• The 5% follow through rule for major buy signals worked for the very long term cycle low in late 2000 and for the long term cycle lows in late 2001, on 7-26-02, and on 5-10-04. Also, the 5% follow through rule for major buy signals would have weeded out the 12-8-04 and the 1-6-05 short term cycle lows as potential major bottoms. Therefore, the likelihood that the 5% follow through rule for major buy signals is pure luck is approximately 50% raised to the fourth power = 0.50 x 0.50 x 0.50 x 0.50 = 0.0625 x 100% = 6.25%. So, there's about a 93.75% probability that the 5% follow through rule for major buy signals will be effective, which indicates that the lows are probably in.
  

• The XAU has downside gaps at 89.65 and 93.15 that may get filled this week. NEM has downside gaps at 41.39 and at 40.51 that may get filled this week. HUI has very small if any gaps from looking at the Yahoo 5 day chart, that's why I don't mention HUI. 

• To gain some perspective, the XAU's largest correction in the previous long term upcycle (from 7-26-02 until 1-6-04) that preceded it's parabolic/sharply rising phase, saw it drop by 25.11% in the course of six weeks (from 82.89 on 1-24-03 to 62.08 on 3-13-03), and, it put in a nearly perfect double bottom two weeks later, so the XAU didn't really begin rising until late March 2003. The recent major correction began at 111.50 on 11-17-04 and the low at 87.60 on 2-8-05 is a 21.43% decline in less than three months. So, this correction has been more shallow so far but about a month longer in duration. They're comparable corrections, which is an important thing to know. HUI's major correction ended on 3-13-03 at 112.61 and began on 1-27-03 at 153.40 for a 26.59% decline in 6 weeks.
  

• The recent major correction in terms of both price and time isn't surprising, made perfect sense, and probably was needed to set up gold/silver stocks for a dramatic rise over the next six months or more. The gold/silver stock market's major correction from 11-17-04 until 2-8-05 probably was a set up for the next major leg up, that is, the second half of the long term upcycle since 5-10-04, and should see HUI rise to about 330 in the next 6 to 9 months. This is about the target one arrives at by connecting the prior peaks/long term cycle highs since the Bull Market began in late 2000 and is also derived below.
  

• Since HUI rose 51.50% in the first half of it's long term upcycle, from 163.81 on 5-10-04 to 248.18 on 11-17-04, the second half of this long term upcycle should see HUI rise considerably more than 51.50%, because cycles tend to become more parabolic/sharply rising over time. If HUI rises about 70% following it's major bottom, then it should rise to about 330 in the next 6 to 9 months (195ish + 195ish times 0.70 = 331.50).

• Late last year the COT data correctly pointed to a major downturn and now they clearly point to a major upturn. The Commercial Traders correctly went massively short late last year and have dramatically traded net long the past seven weeks with last week being a notable exception.

• The report I received via e mail from Marketocracy for the week ending 2-18-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $10.59 vs $10.46 on 2-11, Compliant: Yes, This past week Return: +1.24%." HUI (AMEX Gold Bugs Index) was up +0.52% last week for comparison, so JFR outperformed HUI in four of the past five weeks. I sold 30% of my holdings on Thursday 2-10 which will allow me to take advantage of a test of the lows or at least likely substantial weakness near term. HUI is a better yardstick than NEM or the XAU, since it usually outperforms NEM and the XAU (in upcycles). HUI was up about 70% each year in 2001, 2002, and 2003, so outperforming HUI is no easy task. My imaginary mutual fund JFR is up 5.90% since it's inception on 1-5-05.
  

• The next 6 to 9 months, following the major bottom, 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 was recently 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) 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 6-9 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).

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) typically five days a week (Monday through Thursday and Sunday), 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!
  

• Buy and hold for most investors/traders (until the long term cycle high in probably about 6-9 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 -4.41% to 23.865 on Friday 2-18 from 24.965 on 2-17 versus a -0.16% decline in the XAU on 2-18, which is a very sharp (3-6%) 4.57% rise in complacency (-4.41% + -0.16% = -4.57%. The XAU wall of worry shrank by 4.57%, therefore complacency rose by 4.57%) that portends potentially substantial weakness/a downtrend on Tuesday 2-22 (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 at the open. 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 0.67503 for the March expiration on 2-18 versus at 0.94130 for the final February expiration on 2-18, which is a complacent/low fear level that portends weakness this week. The XAU Put/Call Ratio is at 0.94130 for the February expiration as of 2-18 versus at  0.71995 for the February expiration as of 2-11, which was an unusually large rise in fear that portends short term cycle weakness, but the much higher level of fear points to substantial strength on an intermediate term cycle basis. The XAU Put/Call Ratio was at 0.65704 for the final January expiration value as of 1-21. 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 weakness (but all indicators and cycle channels/trendlines must be considered collectively, not in isolation. Think "system.") in the XAU on Tuesday 2-22 and probably much of this week is the fact that NEM has dramatically underperformed the XAU the past nine sessions by -3.75 %: -0.38% vs -0.16% on 2-18, +0.21% vs +1.57% on 2-17, +0.47% vs +0.09% on 2-16, +0.33% vs -0.49% on 2-15, +0.17% vs +0.45% on 2-14, +1.79% vs +1.88% on 2-11, +2.20% vs +3.90% on 2-10, +0.25% vs +1.14% on 2-9, and by -0.35% vs +0.06% on 2-8.The NEM Lead Indicator is very bearish short term, so gold/silver stocks will probably fall sharply this week and may test the lows that occurred on 2-8 and 2-9.                    

• There's an early warning system in place! 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) (began on July 26, 2002). 
  

• The negative correlation between gold and the USD is now very high. It's -88% on 2-18 (-89% on 2-10) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -60% on 2-18 (-61% on 2-10) 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 114,951 long futures and options contracts versus 197,904 short futures and options contracts (data as of 2-15-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 111,861 long futures and options contracts versus only 61,774 short futures and options contracts (data as of 2-15-05).

• The gold Commercial Traders sold a large 7074 long futures and options contracts and added a large 8114 short futures and options contracts which portends weakness this week (non contrarian indicator). 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 2-15-05, 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 (a few weeks/months).

• The gold Speculators (hedge funds and other speculators/traders) added an unusually large (> 10% increase in long position) 13,288 long futures and options contracts and added 1750 short futures and options contracts which normally portends weakness this week (contrarian indicator), but the unusually large addition to their long position points to some strength, but most of that strength probably occurred last week. 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 22,326 long futures and options contracts versus 81,764 short futures and options contracts as of 2-15-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 45,382 long futures and options contracts versus only 5883 short futures and options contracts as of 2-15-05.

• The silver Commercial Traders sold 418 long futures and options contracts and added an unusually large (> 10% increase in short position) 9248 short futures and options contracts which normally portends weakness (non contrarian indicator) this week, but the unusually large degree of shorting points to some strength, however, most of that strength probably occurred last 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) added an unusually large (> 10% increase in long position) 6431 long futures and options contracts and covered an unusually large (> 10% decrease in short position) 5244 short futures and options contracts which portends normally weakness this week (contrarian indicator), but the unusually large increase in their net long position points to strength, however, most of that strength probably occurred last week. 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 modestly positioned for US Dollar strength with 6690 long futures and options contracts versus 6355 short futures and options contracts as of 2-15-05. Last week they sold an unusually large (> 10% of the long contracts) 880 long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 1079 short futures and options contracts which portends USD strength this week (non contrarian indicator), because they traded net long by 199 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 5579 long futures and options contracts versus 6647 short futures and options contracts as of 2-15-05. Last week they sold 224 long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 1233 short futures and options contracts which normally 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.
  

• 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. This will be a way of establishing an independently calculated track record. 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.

Joe F. Rocks!

-- Posted Tuesday, 22 February 2005 | Digg This Article