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Today's Market WrapUp 07.19.2007 Mon Tue Wed Thu Fri Goldberg Archive Gold
Stocks -- Impending Breakout or Just Another Failure to Launch
Since correcting off of a high of 400 made in the spring of 2006, the $HUI Gold Bugs Index has attempted to break above 370 on four separate occasions. But each time it was turned back. Now, it is trying to accomplish this feat once again. There is strong technical evidence to suggest that it will eventually accomplish this bullish breakout, but when this will happen is not quite clear. Tonight I wish to take an intermediate term technical look at the $HUI and illustrate the technical evidence that suggests a strong bullish upside trend is going to occur. The long term chart below illustrates the long term Elliott Wave pattern of the $HUI index at the present time.
Referring to the long term weekly chart above, the simple logic that is shared with Elliott Wave theory is that bull markets occur in three distinct “up” waves that are separated by “corrections” which move against the long term up trend. These three waves are separated by three distinct types of aggressive buyers. The first group that accounts for the first of the three up waves is the one most knowledgeable in the fundamentals behind the bull market. These intelligent folks and insiders are comprised of those who fundamentally understand the justification behind the new bull market. It is these individuals that are aggressively buying while the crowd is selling. In the case of gold stocks, this Wave I began in late 2000, and lasted until December of 2004. Bull markets never go straight up and therefore, there are corrections that follow each distinct long term up wave. The corrections re-instill the bearish sentiment in the crowd that existed before the beginning of the bull market, yet some, if not most, of the original gains made in Wave I still stand up in the face of this correction. In the case of the HUI bull market, this long term correction began in December of 2004 and lasted until the spring of 2005, a period of almost 1-1/2 years. While the beginning of the bull market carried the Gold Bugs index from about 35 to almost 260, the correction that followed only took the index back to about 164, thereby preserving most of the initial gains. Less obvious in terms of simple logic is the breakdown structure of long term trends. Whereas long term bull markets occur in 3 distinct up waves with 2 corrective waves in between, each of the 3 distinct up waves also break down into smaller components of 3 up waves with 2 corrective waves in between. In the case of Wave I in the gold bugs index, these 5 sub-waves are indicated in blue. Similarly less obvious in simple logic is the breakdown of the 2 corrective waves that tend to form in three sub-waves, labeled a, b, and c in blue. (The corrective waves tend to be more difficult to characterize compared to the waves that follow the long term trend.) It is my belief that gold stocks are in a long term bull market, and that we have only completed Wave I and corrective Wave II of the 5 waves. Long term Wave III (up) is now in progress since early summer of 2005. Within the Wave III sub-structure, we have only completed Wave 1 (up), and since spring of 2006, the gold bugs’ index has been in a corrective (down) pattern (Wave 2) within Wave III. A closer look at the corrective Wave 2 is in order as illustrated in the 3-year weekly chart below. You can see the $HUI’s four attempts at breaching the 370 barrier, each of which was turned back with a sharp and painful correction. Each of these corrections brought the index sharply below the 10 and 40 week moving averages. What is particularly bullish is that with each correction, the $HUI made a higher low before again trying to challenge 370. The consecutive higher lows suggest that when the existing trading range resolves, it will resolve to the upside. Also, in 5 consecutive weeks in May and June, the $HUI tried to break below 318 and this level held thereby forming a strong support level.
One trend that provided a reason for gold bugs to be skeptical may have reversed somewhat on Wednesday. This is the trend of gold tracking in the same direction as stocks. This is illustrated in the chart below which shows the performance of the broad based Wilshire 5000 plotted with the performance of gold in the most recent 9 months. On Wednesday gold was up over 1.2% while the S&P 500 was down. One day does not make a trend, but this is one relationship worth watching.
Strategically, once again gold stock traders find themselves in the same predicament they faced on 4 separate occasions since the spring of 2006. That is, of waiting for the overbought $HUI to break out into new high ground or to pull back from its overbought condition. A pull back appears to be likely, but the paradox is that if a strong breakout into new high ground were to occur, it should probably be bought. Such a breakout would likely signal the beginning of Wave 3 of Wave III – the full force resumption of the gold stock bull market. Today’s Market The $HUI finished today’s trading at 371, thereby breaking the illusive 370 barrier albeit, not yet decisively. Spot gold is at 677/ounce as I write this. Both gold and the market were up, and Bernanke told us for the second consecutive day that everything was A-okay as in sustained economic growth and tame inflation for the US economy. Although a concern, the subprime debacle according to Bernanke is not a big deal. IBM supplied the fuel to take the market higher while the Dow and S&P made all time highs. And what can be better than the background noise of paying homage to Dow 14,000? There is nothing one can say that is politically correct about the stock market except to get behind this roaring bull market and cheer! The trend is up and should be enjoyed by everyone. Just try to criticize this stock market party and you will get hung up there – first to dry and then burned in effigy. (You will then be deemed a contrarian indicator.) If you are a money manager, you will lose clients. If you are a newsletter writer, you will lose subscribers. (Hey, who cares, I’m neither.) While this is happening, the media and financial professionals have convinced everyone, including themselves, that valuations are quite reasonable at these levels, and there is no reason to think about the lack of dividends. Buyouts are a good thing of course, even though it is clear that insiders from most companies buying back shares are themselves strong net sellers of their company stock. Tomorrow the market will absorb disappointing results from the leader of the latter half of the bull market – Google. It’s trading down about 7% in the aftermarket. It will have to absorb a lesser disappointment from Microsoft, and positive results from the highly visible Sandisk, and Intel’s tiny nemesis, AMD. Of course, it is likely to easily absorb the bad news. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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