Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

HUI - XAU

In our  report for the Gold Mining Stock Indices on 8-14-05, we said:

"The index has broken above 2 resistance lines and it is getting ready to challenge the third one at 220, while both the ADX and the Aroon Indicator are on a  "BUY" signal. If the pattern continues to hold, we ought to see a pullback  lasting between 2-6 days and then another push to the upside."

Let's  see where we are now:

The HUI has achieved its upside objective, and at this point the odds favor a pullback.

Gold also has achieved its upside objective, and the odds favor a pullback.

Notice that the XAU rallied up to its previous highs, which represents a 45% advance from its May lows. Since October of 2000, every time the XAU has rallied between 45% and 50%, we have gotten a pullback. In the absence of any exogenous event, we don't see any reason why this time  would be any different.

A pullback can take the XAU anywhere between 105.42 and 100.49.

Notice the divergence between the SI25 and price. The SI25 has made a lower low, implying that a pullback is highly probable at this point.

Notice the divergence between momentum and price. The momentum summation index has made a lower low, implying that a pullback is highly probable at this point.

Notice the divergence between the T.O. and price. The T.O. has made a lower high, implying that a pullback is highly probable at this point

The Buy/Sell Equilibrium Index turned lower from the top of its range, implying that a pullback at this point is highly probable.

Notice the divergence between the McClellan Oscillator and price. The Oscillator has made both a lower low and  a lower high, implying that a pullback is highly probable at this point.

The A-D Summation Index  is high enough to suggest that any pullback will be followed by another new high.

Notice that the A-D line has formed a very similar pattern to the one that facilitated the  sharp advance of 2003.

Notice the divergence between the McClellan Oscillator and price. The Oscillator has made both a lower low and  a lower high, implying that a pullback is highly probable at this point.

The Volume Summation Index is high enough to suggest that any pullback will be followed by another new high.

Notice that  Cumulative Volume has formed a very similar pattern to the one that facilitated the  sharp advance of 2003.

Notice the divergence between the V.T.O. and price. The V.T.O. has made a lower high, implying that a pullback is highly probable at this point.

Notice that the trend is up, which means that any pullback from current levels, ought to be followed by new highs.

The hourly chart  shows a "bullish continuation flag," but we doubt it will materialize. We would look either for a print below 107.5, or for a reversal between 112 and 113.5 to go short via the purchase of puts.

Conclusion

Price has met the upside objective, both in the bullion, as well as in the XAU and HUI indices. In addition, all  the indicators have formed negative divergences that four out of five times lead to a pullback between 7% and 14%. The XAU and the HUI have experienced advances from their May lows, of roughly 45%. Since October of 2000, every time these indices have rallied between 45% to 50%, a pullback  has followed.

Therefore, in the absence of an exogenous event that drives the price of the bullion and the indices higher, a pullback with a magnitude of 7% to 14% is imminent. Going forward we see three possible  scenarios: 1) The XAU continues lower from current levels, 2) The XAU makes a marginal new high, and then it reverses to the downside, and 3) The XAU makes a lower high, and then it reverses to the downside. Scenarios #2 and #3 are the most preferable because they allow for the possibility of building a bigger position. However, we must trade the scenario we are dealt with, not the one we had hoped  to deal with! Therefore, if on Monday the XAU continues lower, we will  buy to open the Oct110 puts, but the position will initially be no more than 5%, and ultimately it won't exceed more 10% of our total capital.

Ike Iossif

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us