• Last week's tone as expected was (very bearish NEM lead Indicator two weeks ago) weakness, other than the newsdriven session on 2-22.
  

• Since the latest Commitments of Traders (COT) data is as of Tuesday 2-22, when the massive short covering rally occurred (due to the Bank of Korea's decision to reduce their US Dollar holdings), one can see that the reliable non contrarian gold Commercial traders aggressively shorted the rally and liquidated longs by adding 17,894 short futures and options contracts (on top of the large 8114 short futures and options contracts they added two weeks ago) and sold a large 7885 long futures and options contracts, while the notoriously contrarian gold Speculators engaged in a large degree of short covering near 2-22's short term cycle high (potential intermediate term cycle high) by covering 8575 short futures and options contracts and they traded aggressively long by adding 11,710 long futures and options contracts. So, the reliable non contrarian gold Commercial traders didn't flinch in the face of Tuesday 2-22's monster rally, they aggressively shorted into it and liquidated their long positions for the second consecutive week.
  

• The US Dollar hit an intermediate term cycle sell signal last week (see chart below). It plunged on 2-22 due to the Bank of Koea's decision to sell some of it's USD holdings but may have put in an intermediate term cycle low last week, so the USD may rally this week. The latest USD Commitments of Traders (COT) data (as of 2-22-05) suggests that the USD will experience a countertrend rally/intermediate term upcycle in the near future (may begin this week) and should send gold/silver stocks down sharply in the near future. The USD Commercial Traders traded dramatically net long (contrarian case short term for this normally non contrarian indicator) as discussed in detail later, which could mean that there might be some weakness in the US Dollar (probably early) this week, while the USD Speculators traded dramatically net short (non contrarian case short term for this normally contrarian indicator), which could mean that there might be some weakness in the US Dollar (probably early) this week. However, even the USD Speculators expect USD strength soon because they added an unusually large (> 10% increase) 1200 long futures and options contracts.
  

• The remainder of the charts that include the very long term upcycle/Bull Market charts and the recent major 5% buy signals for HUI, NEM, and the XAU can be found at the bottom.
  

• Stochastics and Williams %R for HUI, NEM, and the XAU are at very overbought levels which means that risk is high on a short term and intermediate term cycle basis.

• The NEM Lead Indicator correctly portended weakness following Tuesday 2-22's massive short covering rally sparked by the Bank of Korea's decision to sell a substantial portion of it's US Dollar holdings (they're number four in USD holdings not including the US of course), that saw XAU rise by +3.78% with short term (potentially intermediate term) cycle highs occurring on 2-22 for HUI and the XAU.
  

• A long term upcycle has been in place since 5-10-04 and a secular Bull Market/very long term upcycle has been in place since late 2000 for HUI, NEM, and the XAU (charts are at the bottom).
  

• The NEM Lead Indicator is very bullish (NEM outperformed the XAU by +2.76% last week) which suggests substantial strength if a short term upcycle is in place or at worst modest downside in a short term downcycle, BUT, if 2-22 was an intermediate term cycle high, then there could be substantial downside, however, probably a relatively modest amount (7-8%) near the low end of a typical short intermediate term downcycle, that usually results in an 8-12% decline in about a week's time. NEM outperforming the XAU by a wide margin could mean that an intermediate term upcycle remains in place. If the channels break down then an intermediate term downcycle is probably in place.
  

• Since cycles usually begin relatively flat it's likely that a low will occur in the near future fairly close to the likely major bottom/intermediate term cycle low that occurred on 2-8 for HUI at 190.45 and at 87.60 for the XAU and on 2-9 for NEM at 40.07. When one understands cycles one will rarely be buying during sharp uptrends (would be buying late because cycles usually begin flat) but will usually buy during the relatively flat portion of a cycle shortly after a dramatic plunge/steep part of the downcycle's curve (that usually culminates in a cycle low for whatever cycle timeframe one trades). Usually at least half or nearly so of the gains seen in an upcycle are given back in the down segment of a cycle anyway. So, even if a low doesn't occur near those on 2-8 and 2-9 a substantial decline is likely in the near future. The risk/reward ratio doesn't favor going long at this time, from a short intermediate term cycle standpoint (a few weeks).
  

• Classical technical indicators such as RSI (Relative Strength Index), Stochastics, and Williams %R all became very overbought last week for HUI, NEM, and the XAU. I find that Williams %R is the most useful classical technical indicator. One will rarely buy overbought conditions, except maybe during a major breakout. Typically near intermediate term cycle lows Williams %R becomes oversold or nearly so.
  

• The XAU's downside gap at 96.29 created at 2-22's open may be filled in the near future.
  

• 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 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 eight weeks with the last two weeks being a notable exception.

• The report I received via e mail from Marketocracy for the week ending 2-25-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $10.68 on 2-25 vs $10.59 on 2-18, Compliant: Yes, This past week Return: +0.81%." HUI (AMEX Gold Bugs Index) was up +2.62% last week for comparison, so JFR outperformed HUI in four of the past six 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 that probably occurred on 2-8 for HUI and the XAU, 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 -1.87% to 24.370 on Friday 2-25 from 24.835 on 2-24 versus a +0.36% rise in the XAU on 2-25, which is a significant (0.50-1.99%) 1.51% rise in complacency (-1.87% + +0.36% = -1.51%. The XAU wall of worry shrank by 1.51%, therefore complacency rose by 1.51%) that portends weakness/a downtrend on Monday 2-28 (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 0.71402 for the March expiration on 2-25 versus 0.67503 for the March expiration on 2-18 versus 0.94130 for the final February expiration on 2-18. 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 strength in a short term upcycle or modest weakness in a short term downcycle (but all indicators and cycle channels/trendlines must be considered collectively, not in isolation. Think "system.") is the fact that NEM dramatically outperformed the XAU last week by +2.76%: +0.27% vs +0.36% on 2-25, -0.07% vs -1.16% on 2-24, +0.52% vs -0.24% on 2-23, +4.78% vs +3.78% on 2-22 (-3.75 % in the prior 9 sessions: -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).                    

• 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 2-25 (-88% on 2-18) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -60% on 2-25 (-60% on 2-18) 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 107,067 long futures and options contracts versus 215,797 short futures and options contracts (data as of 2-22-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 123,571 long futures and options contracts versus only 53,199 short futures and options contracts (data as of 2-22-05).

• The gold Commercial Traders sold a large 7885 long futures and options contracts and added a large 17,894 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 2-22-05, 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 bordering on an unusually large (> 10% increase in long position) 11,710 long futures and options contracts and covered an unusually large (> 10% decrease in short position) 8575 short futures and options contracts which normally portends weakness this week (contrarian indicator), but the unusually large increase in their net 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 21,645 long futures and options contracts versus 86,581 short futures and options contracts as of 2-22-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 49,614 long futures and options contracts versus only 4997 short futures and options contracts as of 2-22-05.

• The silver Commercial Traders sold 680 long futures and options contracts and added a large 4817 short futures and options contracts which portends weakness (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) added a large 4232 long futures and options contracts and covered an unusually large (> 10% decrease in short position) 886 short futures and options contracts which normally portends weakness this week (contrarian indicator), but the unusually large degree of short covering 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 positioned for US Dollar strength with 10,655 long futures and options contracts versus 4340 short futures and options contracts as of 2-22-05. Last week they added an unusually large (> 10% increase in long contracts) 3965 long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 2015 short futures and options contracts which portends USD weakness this week (normally non contrarian indicator), because the unusually large increase in their net long position is the contrarian case, but most of that weakness probably occurred last week. 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 6779 long futures and options contracts versus 12,813 short futures and options contracts as of 2-22-05. Last week they added an unusually large (> 10% increase in the long contracts) 1200 long futures and options contracts and added an unusually large (> 10% increase in short contracts) 6166 short futures and options contracts which portends USD strength this week (contrarian indicator), because they traded net short by 4934 futures and options contracts. 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 Monday, 28 February 2005 | Digg This Article