• HUI, NEM, and the XAU followed through by more than 5% after breaking their intermediate term downcycle trendlines in place since 11-17-04 (see HUI chart dated 6-3-05). Therefore, major buy signal requirement number two has been satisfied, with requirement one, a clearly bullish NEM Lead Indicator, being satisified by the recent five week stretch in which NEM significantly outperformed the XAU. The two major buy signal requirements would have weeded out all six previous important cycle lows in the major correction from being major cycle low candidates, and, there's only a 1.56% chance that result was due to pure luck (50% raised to the sixth power).
  

• Major intermediate term cycle lows probably occurred for HUI, NEM, and the XAU on 5-16-05 at 165.71 for HUI, at 34.90 for NEM, and at 78.23 for the XAU, that were above their long term cycle lows that occurred at 163.81 for HUI, at 34.70 for NEM, and at 76.79 for the XAU on 5-10-04.
  

• Additional confidence factors that point to May 16 being a major bottom include the fact that the gold Commercial Traders added aggressively to their long position for a few weeks following the major bottom in addition to engaging in massive short covering, the USD Commercial Traders are now massively short, reliable lead indicator NEM rallied on well above average volume, the XAU Put/Call Ratio (June expiration) remained steady near 0.80 in recent weeks (despite a substantial rally) which indicates that many doubt the low is in, XAU Implied Volatility spiked dramatically near the May 16, 2005 major intermediate term cycle low (rose to 32 area from below 25 in early April 2005) in similar fashion to what occurred near the May 10, 2004 long term cycle low (rose to 42.50 area from 30.50 area in early April 2004), and an Elliot Wavesque A, B, C correction pattern culminated on May 16, 2005. The higher short intermediate term cycle low on June 9 (about a one month low) confirms that May 16 is a major bottom (a rising bottoms long intermediate term upcycle trendline is in place).
  

• The USD's major intermediate term upcycle since late December 2004 may have broken down last week. Please see the six month USD chart below. When spike moves break down they tend to fall hard and fast, which is typical behavior following dramatic spike moves. The more dramatic the spike move the more dramatic the breakdown tends to be.
  

• Williams %R is in overbought territory (above -20) for HUI (-9.00)/NEM (-8.60)/XAU (-10.20) on 6-17-05. If it hits an extremely overbought level near 0 that's a reliable indication to  to look to take profits.

• The COT (Commitments of Traders) data (as of 6-17-05) for gold and silver points to strength in gold and volatility with a bias toward weakness in silver. The gold Commercial Traders sold 4162 (639, 23,530 sold the prior two weeks, 11,214, 860, 11,417, 9363 added the prior four weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 17,891 (added 8457 the prior week, covered 37,593, 8497, 29,470, 17,544, 26,014 the prior five weeks) short futures and options contracts which portends strength this week (non contrarian indicator), because the unusually large degree of short selling is the contrarian case short term. The gold Speculators data also points to strength. All of the COT data can be found toward the bottom of this update.
  

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness (massively short) with 3380 long futures and options contracts versus 22,205 short futures and options contracts as of 6-17-05. A few months ago they were substantially net long, so they've dramatically repositioned themselves for a major decline in the US Dollar, which is great news for precious metals in US Dollar terms.
  

• The Commercial Traders (typically) correctly begin to take substantial profits as a cycle rolls over/weakens (following cycle parabolic trendline sell signals) while the Speculators tend to overshoot when making the various trading decisions (buying, selling, shorting, short covering).
  

• Gold will probably take out it's early February low near $410 since it usually lags gold stocks at major cycle highs/lows. Gold peaked in early December 2004 versus HUI, NEM, and the XAU doing so on 11-17-04 and gold peaked in early April 2004 versus HUI and NEM doing so on 12-2-03 and the XAU doing so on 1-6-04 (long term cycle highs).
  

• A new indicator is Chaikin Money Flow (CMF) for reliable lead indicator Newmont Mining (NEM). Money flow is a primary fundamental indicator. Notice how NEM CMF turning negative tends to correspond closely with the beginning of sharp downcycles. Please see the 2 year NEM chart below dated 6-17-05. NEM CMF closed at -0.02 for NEM on 6-17-05. Given that a CMF level of -0.25 for NEM reflects strongly negative CMF, then -0.02 is modestly negative CMF.
  

• Interestingly, at this point the long term upcycle for HUI, NEM, and the XAU is similar to the previous ones (see the HUI 5 year chart). The cycle timeframes are getting longer however. The prior two long term cycles in this gold/silver stock Bull Market (since late 2000) had lower major (intermediate term cycle) highs after long term cycle highs that were followed shortly thereafter by the parabolic/sharply rising segment of the long term upcycle (the long term cycles have been getting longer, see the HUI 5 year chart). The trend of longer long term cycles means that major corrections will tend to be longer also.
  

• The negative correlation between gold and the USD is not as high as the correlation coefficient makes it seem, since it's the square root of the strength of the correlation. It's -66% on 6-17 (-72% on 6-10) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -3% on 6-17 (-16% on 6-10) 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 positive correlation between gold and the S & P 500 is 28% for the past 180 days (positive correlation with silver is only 2%), according to Moore Research Center, Inc. This means that the S & P 500 determines 7.84% of gold's price action/variability (Coefficient of Determination = 28% squared = 7.84%). The S & P 500's sharp decline from early March until late April is a major reason why gold and gold stocks were weak during that stretch (positive correlation between gold and the S & P 500 for the past 180 days was at 60% 5 weeks ago). The next bullet discusses the Coefficient of Determination.
  

• The Coefficient of Determination is the square of the correlation coefficient (the true strength of the correlation is determined by squaring the correlation coefficient) and explains how much the USD is determining gold's and silver's price action/variability or the S & P 500 is determining gold's or silver's price action/variability. The US Dollar determines 43.56% (-66% times -66% = 43.56%) of gold's price action/variability now since the USD's negative correlation with gold is -66% as of 6-17-05. The USD determines only 0.09% of silver's price action/variability since the USD's negative correlation with silver is -3% as of 6-17-05. The correlation coefficient, r, provides the direction of the correlation (+ or  -) but only the square root of the strength of the correlation. The coefficient of determination, r², provides the true strength of the correlation but without indicating its direction. Both of them must be used to fully understand the entire picture regarding correlation's effect.

• The Gold:XAU Ratio (currently at 4.71) may become a third major buy signal criterion, along with 5% follow through and a clearly bullish NEM Lead Indicator. Per Myles Zyblock, Chief North American Institutional Strategist at RBC Capital Markets, when it's above 5.0 (12% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been +38.4% and in only one instance was there a loss. When it's below 3.0 (5% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been -24.3% with no instances of an up year. As a stand alone indicator, at least for trading purposes, the Gold:XAU Ratio probably isn't highly useful because obviously both gold and the XAU can fall 10% or more in tandem after reaching 5.0 or rise 10%+ after reaching 3.0. However, I need to research/backtest this. 5.25 or even 5.50 might be a better criterion.
  

• The remainder of the charts can be found at the bottom. The very long term upcycle trendlines are now relatively flat rather than parabolic (with a segment having turned up), but the major buy/sell signals shown still apply. The last HUI chart below shows the major cycle highs/lows in this gold/silver stock Bull Market, but the very long term upcycle trendline is now flat rather than parabolic, or at least much flatter than it was, so the very long term upcycle trendline in that chart is now wrong (the last segment is wrong).
  

• The report I received via e mail from Marketocracy for the week ending 6-17-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $9.93 on 6-17 vs $9.51 on 6-10, Compliant: Yes, This past week Return: +4.39%." HUI (AMEX Gold Bugs Index) was up +5.25% last week for comparison, so JFR outperformed HUI in 11 of the past 22 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 0.70% since it's inception on 1-5-05.
  

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) regularly, 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 just above the "Current Assessment." Fascinating!
  

• XAU Implied Volatility fell -3.15% to 25.340 on Friday 6-17 from 26.165 on 6-16 versus a +0.55% rise in the XAU on 6-17, which is a sharp (2-2.99%) 2.60% rise in complacency (-3.15% + +0.55% = -2.60%. The XAU wall of worry shrank by -2.60%, therefore complacency rose by 2.60%) that portends weakness/a downtrend on Monday 6-20 (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 and early strength. 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 0.93135 for the July expiration on 6-17 versus at 0.76954 for the June expiration on 6-17 versus at 0.87064 for the June expiration on 6-10 versus at 0.80155 for the June expiration on 6-3 versus at 0.55895 (May expiration) on 5-19 versus at 1.13583 (May expiration) on 4-22 versus at 0.48700 for the final April expiration on 4-15 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 +0.09% (underperformed the XAU the prior four weeks by -0.39%, -0.72%, -0.69% and -1.87%, outperformed the prior week by +0.45%, underperformed the prior two weeks by -2.15% and -1.17%, outperformed the five prior weeks by +0.10%, +1.83%, +0.08%, +0.44% and +0.97%): +0.68% vs +0.55% on 6-17, +3.46% vs +3.34% on 6-16, +0.81% vs +1.58% on 6-15, -1.17% vs -1.49% on 6-14, +1.21% vs +0.92% on 6-13. NEM underperformed the XAU the week before last by -0.39%: +3.26% vs +3.71% on 6-10, +0.33% vs +0.19% on 6-9, -0.35% vs -0.27% on 6-8, -1.94% vs -1.95% on 6-7, -1.16% vs -1.15% on 6-6. NEM underperformed the XAU three weeks ago by -0.72%: +1.06% vs +0.92% on 6-3, -0.29% vs -0.71% on 6-2, +1.40% vs +1.97% on 6-1, -0.93% vs -0.22% on 5-31. NEM underperformed the XAU four weeks ago by -0.69%: +3.27% vs +3.72% on 5-27, -0.52% vs -1.03% on 5-26, -0.22% vs +0.30% on 5-25, +2.40% vs +2.47% on 5-24, +1.36% vs +1.52% on 5-23. NEM underperformed the XAU five weeks ago by -1.87%: -1.56% vs -1.19% on 5-20, -0.31% vs -0.62% on 5-19, +1.66% vs +2.06% on 5-18, +1.17% vs +2.31% on 5-17, -0.60% vs -0.33% on 5-16. NEM outperformed the XAU six weeks ago by +0.45%: -2.16% vs -1.67% on 5-13, -2.93% vs -3.64% on 5-12, -0.93% vs -0.96% on 5-11, -1.99% vs -2.08% on 5-10, +0.45% vs +0.34% on 5-9. NEM underperformed the XAU seven weeks ago by -2.15%: -0.91% vs -0.25% on 5-6, -1.00% vs -0.46% on 5-5, +1.94% vs +2.02% on 5-4, +1.06% vs +1.10% on 5-3, -0.66% vs +0.17% on 5-2. NEM underperformed the XAU eight weeks ago by -1.17%: +3.10% vs +1.68% on 4-29, -2.31% vs -1.70% on 4-28, -6.34% vs -4.02% on 4-27, -1.64% vs -1.73% on 4-26, +0.47% vs +0.22% on 4-25. NEM outperformed the XAU nine weeks ago by +0.10%: -0.10% vs -0.69% on 4-22, -1.09% vs -1.09% on 4-21, -1.51% vs -0.91% on 4-20, +2.45% vs +3.14% on 4-19, +2.72% vs +1.92% on 4-18. NEM outperformed the XAU 10 weeks ago by +1.83%: -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 11 weeks ago 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 12 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 13 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 reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness with only 82,434 long futures and options contracts versus 175,074 short futures and options contracts (data as of 6-14-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 123,715 long futures and options contracts versus only 64,827 short futures and options contracts (data as of 6-14-05).

• The gold Commercial Traders sold 4162 (639, 23,530 sold the prior two weeks, 11,214, 860, 11,417, 9363 added the prior four weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 17,891 (added 8457 the prior week, covered 37,593, 8497, 29,470, 17,544, 26,014 the prior five weeks) short futures and options contracts which portends strength this week (non contrarian indicator), because the unusually large degree of short selling is the contrarian case short term. The most important consideration in timing any market is the cycle channels/trendlines (see chart above) and keep in mind that the data is as of 6-14-05, 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 a large 9645 (added 789 the prior week, sold 115, 9331, 11,417, 19,091, 22,590 the prior five weeks) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 8655 (covered 5491 the prior week, added 12,638, 7410, 13,922, 8331, 10,107 the prior five weeks) short futures and options contracts which portends strength this week (contrarian indicator), because the unusually large degree of short covering is the non contrarian case short term. The most important consideration in timing any market is the cycle channels/trendlines (see chart above). 

• 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 29,178 long futures and options contracts versus 105,430 short futures and options contracts as of 6-14-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 59,817 long futures and options contracts versus only 5630 short futures and options contracts as of 6-14-05.

• The silver Commercial Traders added an unusually large (> 10% increase in long contracts) 5964 (4750, 4443 sold the prior two weeks, 1363 added the week before, 507, 5858 added the two weeks ending 5-10-05) long futures and options contracts and added a large 3414 (added 9289, 14,467, 2447 the prior three weeks, covered 226 the week ending 5-17-05, and covered 14,841 the week ending 5-3-05) short futures and options contracts which portends weakness (non contrarian indicator) this week, because the unusually large increase in the long position is the contrarian case short term for this normally non contrarian indicator. The most important consideration in timing any market is the cycle channels/trendlines.

• The silver Speculators (hedge funds and other speculators/traders) sold a large 5182 (added 12,457, 15,429 the prior two weeks, sold 41, added 611, sold 823, and sold 7580 in the prior five weeks) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 1716 (covered 2807, 2801, 996, 1239, 2750 the prior five weeks, and added 13,999 the week before) short futures and options contracts which portends strength this week (contrarian indicator), because the unusually large degree of short covering is the non contrarian case short term for this normally contrarian indicator. The most important consideration in timing any market is the cycle channels/trendlines.

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness (massively short) with 3380 long futures and options contracts versus 22,205 short futures and options contracts as of 6-14-05. Last week they sold an unusually large (> 10% decrease in long contracts) 7545 (added 5823, 102 added, 360 added, 2151 sold the prior four weeks, and 616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 6482 (6056, 1196, 2931,7151, 307, 2494 added the prior six weeks and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts which portends USD volatility with a bias toward weakness this week (non contrarian indicator), because they traded significantly net short (over 1000 more long contracts sold than short contracts covered). The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

• The notoriously contrarian (in terms of their trading activity) USD Speculators are now incorrectly positioned for US Dollar strength (massively long) with 19,469 long futures and options contracts versus 2636 short futures and options contracts as of 6-14-05. Last week they added 1490 (added 372, 924, 1537, 6453, 361, and 1515 in the prior six weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 614 (covered 404, covered 115, covered 1010, covered 1710, added 662 and 22 the prior six weeks) short futures and options contracts which portends USD weakness this week (contrarian indicator), because of the unusually large degree of short selling (non contrarian case short term). The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

• 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.
  

• My system/work is NOT about me making educated guesses and calling bottoms, even though I (mistakenly) did that in the major correction from 11-17-04 until 5-16-05 for HUi, NEM, and the XAU, partly for reasons such as HUI having, until recently (early April), a well developed trendline since 5-10-04's long term cycle low that appeared to be it's long term upcycle trendline. The reason why I'm developing a backtested system ("Trade the Cycles") is because it's impossible to consistently time the market (by educated guessing) using an unbacktested approach comprised of technical analysis and indicators. From now on, where major bottoms are concerned, I'll only indicate that a likely major bottom has occurred after the two major buy signal criteria are satisfied (The 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks). 

• The 5% follow through major buy signal requirement (after breaking through the intermediate term downcycle trendline connecting short term cycle highs) weeds out the December 8, 2004, January 6, 2005, March 29, 2005, April 15, 2005, and the April 28 cycle lows from being a major intermediate term cycle low, but not the February 8 (HUI/XAU)/9 (NEM) 2005 cycle low. However, the NEM Lead Indicator clearly indicated (weeds out) that the February 2005 cycle low probably wasn't a major low. It appears that the 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks will work well for timing/major buy signals. Also, an Elliot Wave type A, B, C major correction pattern is likely to occur, with point C, the major cycle low, occurring relatively close to the Bull Market/very long term upcycle trendline, which helps.
  

• Buying and holding major intermediate term upcycles (that last about 3 to 12 months) makes a lot of sense, but not long term or very long term upcycles, because they're too flat (rising bottoms) and one loses too much during major corrections (However, with good stock selection, one can do very well with buy and hold during this gold/silver stock Bull Market/very long term upcycle that began in late 2000). This is a change from my belief that one should hold during long term upcycles. One should wait for a major intermediate term cycle buy signal before buying. So, it makes sense to be long during major intermediate term cycle buy signals and in cash and/or short during major intermediate term cycle sell signals.
  

• Cycle channels/trendlines 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.

• 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).

• 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 the near future, partly because of how great the gold/silver stock market is, but also 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 to 12 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 Monday, 20 June 2005 | Digg This Article