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Technical Analysis - HUI

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

Usually we have been publishing equity technical pieces on Tuesdays and Thursdays, but the pattern and technical setup in the Amex Gold bugs index (HUI) is presenting an interesting setup, so we're interrupting our regular publishing schedule. Options are available for the index and 3 stocks constitute 40% of the weighting of the index (Gold Fields Limited (GFI:NYSE), Newmont Mining Corp. (NEM:NYSE), Freeport McMoran Copper & Gold Inc (FCX:NYSE)), providing several ways to participate in a potential move lower I suspect may occur in this index.

Longer term, the HUI made an all-time high in January 2004, posting a monthly Demark trend exhaustion indicator after completing a clear 5 wave advance off the 2000 lows. The daily chart shows that the HUI has traced out a clean 1-2-3-4 wave pattern so far, with the 4th wave either complete at the May high of 203.45 or possibly soon completing in a 4th wave triangle pattern (a typical pattern in 4th wave corrective moves). Both of these "counts" call for a move below the May lows of 163.81 in the near term. And since momentum was decisively confirming those May lows, a 5th wave decline below those May lows may be in the cards.

The short term (hourly) chart presents two possible interpretations: (1) a 4th wave corrective bounce occurred on 5/27 at 203.45 and the 5th wave is tracing out to below 160 now or (2) a 4th wave triangle (labeled ABCDE) is tracing out from the 3rd wave low on 5/10 at 163 that has completed the A, B, and C waves, with the D wave (down to 180-184) and the E wave (up to 190ish) to go before prices thrust lower from this triangle pattern below 160. Either interpretation of the near term pattern calls for prices to move decisively lower from here.

In my opinion, I would expect the HUI to see prices in the next 1-2 months below 160 and most likely in the 140-150 range at a minimum (possibly lower). Parenthetically, the Philadelphia Gold and Silver index (XAU) has almost precisely the same technical setup as the HUI. Traders, then, can choose from among the options or stocks that make up either of these two important precious metals indices to consider participating in the potential downside below the May lows.

From a macro standpoint, it is interesting to note that the technical conclusions that our indicators are reaching go squarely against the prevailing conventional wisdom that gold and silver - and the stocks that represent them - are in a new bull market. Whether or not that conventional wisdom is true, if the May lows are taken out (and our indicators suggest that is a high probability), gold and silver stocks are in for a potentially large correction over the next few quarters. Given the risk/reward setup presenting itself right here, the analysis suggests that levels will decline, unless the the index reaches the level of the May highs, at which point I would have to reassess the technical indicators.

No positions in stocks mentioned.

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