• VIX, the S & P 500 Volatility Index/sentiment indicator, has risen dramatically recently from a low near 11 to the 18 area (17.74 close on 4-15-05), which was an unusually large rise in fear that correctly portended substantial short term S & P 500 weakness, but the high level of fear/solid wall of worry should soon lead to a substantial rise in the S & P 500, which will help Newmont Mining (NEM, part of the S & P 500), and hence gold/silver stocks in general, because NEM is the largest component of HUI/the XAU and is of course a very reliable lead indicator for gold/silver stocks.
  

• Please ignore the people who say that VIX and other implied volatility indicators don't work. They do work but they MUST be used relativistically. That is, if VIX rises 2% in a session and the S & P 500 falls 1% in a session, that's a 1% rise in fear that usually correctly portends strength during the next day's session. The converse case, if VIX rises 1% in a session versus a 2% decline in the S & P 500 in a session, is a 1% rise in complacency that usually correctly portends weakness during the next day's session. This is what I do of course with XAU Implied Volatility. The non contrarian case is when there's greater than a 6% rise in fear weakness usually occurs and when there's greater than a 6% rise in complacency strength usually occurs. The important caveat here is that cycle channels/trendlines are the most important consideration when timing any market. When an indicator portends strength it portends more strength in an upcycle than a downcycle and more strength on the steep part of an upcycle's curve, etc.
  

• News such as last week's Fed statement can exaggerate but doesn't change cycles. This is also true of any manipulation that may occur in the markets.
  

• The good news is that HUI, NEM, and the XAU are near the bottom of their Bull Market/very long term upcycle channels (see 5 year charts below), and, in the prior two long term upcycles, shortly after they reached the bottom of those channels, they entered the parabolic/sharply rising phase of their long term upcycles.
  

• The relatively flat (cycles typically flat early on) start to this long term upcycle since May 10, 2004 (long term cycle lows at 163.81 for HUI, at 34.70 for NEM, and at 76.79 for the XAU) suggests that the next 6 to 12 months will be the parabolic/sharply rising segment of the long term upcycle. HUI's target for the long term upcycle is 330 versus it's prior long term cycle high at 258.60 on 12-2-03.
  

• HUI and NEM's Bull Market channels could end up being a bit flatter than I drew them (see five year charts below), but the XAU's, which is well defined, suggests a maximum of about 3% downside from Friday 4-15's close at 86.39.
  

• Major intermediate term cycle lows may have occurred just before the close on Friday 4-15 at 179.97 for HUI, at 39.60 for NEM, and at 86.25 for the XAU. NEM's high volume of 6.74 million shares and the very high volatility on 4-14 were two signs that a major low might be imminent. Yahoo only shows bars on it's 5 year bar chart for complete months, so the current month's bar is unfortunately missing. I'll look for other charts. StockCharts.com only goes back three years, otherwise I would have used their charts.
  

• The longer and deeper the correction/downcycle, the longer and greater the subsequent upcycle is likely to be. This correction began on 11-17-04, so it's about five months old, which is surprisingly long, so the coming upcycle should be a great one.

• A downside surprise occurred in the prior long term upcycle in March 2003 just before gold/silver stocks went parabolic and rose dramatically for nine months. See the XAU 5 year chart dated 4-15-05 below.

• The NEM Lead Indicator is very bullish. NEM outperformed the XAU last week by +1.83% and in the prior three weeks by +0.08%, +0.44% and +0.97%.
  

• The XAU Put/Call Ratio for the May expiration is at a high fear level of 1.10579 on 4-15 versus 0.71395 (April expiration) on 4-8, which is a major positive, because a solid wall of worry is in place for the XAU.

• XAU Implied Volatility rose +3.28% to 27.855 on Friday 4-15 from 26.970 on 4-14 versus a -0.91% decline in the XAU on 4-15, which is a sharp (2-2.99%) 2.37% rise in fear (+3.28% + -0.91% = +2.37%. The XAU wall of worry grew by 2.37%, therefore fear rose by 2.37%) that portends potentially substantial strength/an uptrend on Monday 4-18.
  

• Williams %R for HUI, NEM, and the XAU is in very oversold territory between -95 and -100 (oversold at or below -80, see charts below), which is an indication that strength is likely this week.
  

• The reliable non contrarian gold Commercial Traders engaged in massive short covering recently but correctly traded net short last week ending 4-12-05, and, were engaged in significant long liquidation in recent weeks. The Commitments of Traders (COT) data pointed to weakness last week, since the gold Commercial Traders sold 3626 long futures and options contracts in the week ending 4-5-05, sold 1578 long futures and options contracts and added 5329 short futures and options contracts in the week ending 4-12-05. While the gold Commercial Traders engaged in massive short covering in recent weeks (last week being an exception), they also engaged in significant long liquidation, which correctly pointed to weakness.
  

• Exact same situation as last week regarding the US Dollar (see chart below). The intermediate term upcycle and very long term downcycle trendlines are converging, which should soon send the USD lower. The close near the session low on 4-15 points to weakness on 4-18.
  

• Gold appears to be headed for it's long term upcycle trendline, which could end up being flatter than drawn.
  

• The major buying opportunity I've been expecting probably occurred the past three weeks and remains in effect this week, barring a substantial rise.
  

• The long term upcycle should soon go parabolic, which means that the long term upcycle trendlines should soon have a sharper rate of ascent. The next 6 months or so should be an outstanding time for gold/silver stocks.
  

• Cycles are the most important consideration when timing any market. A very long term upcycle has been in place since late 2000 and a long term upcycle has been in place since May 10, 2004 for HUI, NEM, and the XAU (gold began a very long term upcycle in April 2001). Very long term upcycles (and downcycles) tend to last about 17.5 years on average. Gold's previous very long term downcycle lasted from 1980 until April 2001.
  

• Cycle channels/trendlines are the most important consideration in timing any market. As I've said before, if you find that the detailed technical work is too much to digest, the cycle channels/trendlines in the charts are by far the most important consideration, so one can still use my system even if the indicators/technical work are difficult to grasp (right now, sometimes with perseverance one might grasp it).

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

• Late last year the COT data correctly pointed to a major downturn and now they clearly point to a major upturn. The gold Commercial Traders correctly went massively short late last year and traded dramatically net long near the early February lows as well as recently.

• The report I received via e mail from Marketocracy for the week ending 4-15-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $8.88 on 4-15 vs $9.80 on 4-8, Compliant: Yes, This past week Return: -9.40%." HUI (AMEX Gold Bugs Index) was down -9.27% last week for comparison, so JFR outperformed HUI in 6 of the past 13 weeks. 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 down 11.20% since it's inception on 1-5-05. But, I'll be back!
  

• 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 5-8 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 rose +3.28% to 27.855 on Friday 4-15 from 26.970 on 4-14 versus a -0.91% decline in the XAU on 4-15, which is a sharp (2-2.99%) 2.37% rise in fear (+3.28% + -0.91% = +2.37%. The XAU wall of worry grew by 2.37%, therefore fear rose by 2.37%) that portends potentially substantial strength/an uptrend on Monday 4-18 (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 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 1.10579 for the May expiration on 4-15 versus at 0.48700 for the final April expiration on 4-15 versus at 0.71395 for the April expiration on 4-8 versus 1.04250 for the final March expiration on 3-18 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 this week (but all indicators and cycle channels/trendlines (most important consideration) must be considered collectively, not in isolation. Think "system.") is the fact that NEM outperformed the XAU last week by +1.83% (and the prior three weeks by +0.08%, +0.44% and +0.97%): -1.09% vs -0.91% on 4-15, -2.97% vs -3.27% on 4-14, -0.89% vs -1.99% on 4-13, -0.10% vs -0.47% on 4-12, -0.31% vs -0.55% on 4-11. NEM outperformed the XAU the week before last by +0.08%: -0.57% vs -0.35% on 4-8, +0.14% vs -0.28% on 4-7, +0.93% vs +0.75% on 4-6, -0.12% vs +0.35% on 4-5, -1.48% vs -1.65% on 4-4. NEM outperformed the XAU three weeks ago by +0.44%: +0.47% vs +0.30% on 4-1, -0.38% vs +0.54% on 3-31, +2.24% vs +1.43% on 3-30, -0.53% vs -0.72% on 3-29, -0.22% vs -0.41% on 3-28. NEM outperformed the XAU in the holiday shortened week four weeks ago by +0.97%: -0.17% vs -1.01% on 3-24, -1.99% vs -1.94% on 3-23, -1.86% vs -2.06% on 3-22, -2.77% vs -2.75% on 3-21.         

• 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 -86% on 4-15 (-87% on 4-8) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -50% on 4-15 (-53% on 4-8) 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 87,927 long futures and options contracts versus 244,152 short futures and options contracts (data as of 4-12-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 150,278 long futures and options contracts versus only 25,570 short futures and options contracts (data as of 4-12-05).

• The gold Commercial Traders sold 1578 long futures and options contracts and added 5329 short futures and options contracts which portends weakness this week (non contrarian indicator), but most of the weakness may have occurred last week. The most important consideration in timing any market is the cycle channels/trendlines (see charts) and keep in mind that the data is as of 4-12-05, 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 7119 long futures and options contracts and added 427 short futures and options contracts which portends weakness this week (contrarian indicator), but most of the weakness may have 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 25,761 long futures and options contracts versus 86,581 short futures and options contracts as of 4-12-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 41,263 long futures and options contracts versus only 3710 short futures and options contracts as of 4-12-05.

• The silver Commercial Traders added 361 long futures and options contracts and added 2232 short futures and options contracts which portends weakness (non contrarian indicator) this week, but the addition of 361 long futures and options contracts points to some strength and most of the weakness may have 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 1299 long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 954 short futures and options contracts which portends weakness this week (contrarian indicator), but the unusually large degree of short covering points to some strength. 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 now correctly positioned for US Dollar weakness with 5564 long futures and options contracts versus 8565 short futures and options contracts as of 4-12-05. Last week they sold 403 (1728, 2192, 4322, 3274 sold the prior four weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 770 (2662, 2421, 1576 added the prior three weeks) short futures and options contracts which portends USD weakness this week (non contrarian indicator), but the unusually large degree of shorting points to some strength (contrarian case). The most important consideration in timing any market is the cycle channels/trendlines (see charts).
  

• The notoriously contrarian (in terms of their trading activity) USD Speculators are now incorrectly positioned for US Dollar strength with 7192 long futures and options contracts versus 5078 short futures and options contracts as of 4-12-05. Last week they added an unusually large (> 10% increase in long contracts) 1318 long futures and options contracts and covered 262 (2669, 4130, 6942 covered the prior three weeks) short futures and options contracts which portends USD weakness this week (contrarian indicator), but the unusually large increase in their long position portends some strength (non contrarian case), however, the USD may have hit an intermediate term cycle high last week. 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.  

• 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.
  

Joe F. Rocks!

-- Posted Sunday, 17 April 2005 | Digg This Article