Despite very difficult
prevailing stock-market conditions, the HUI unhedged
gold-stock index has soared 55% since mid-August! You’d think gold-stock traders
would be thrilled with such awesome gains. Instead they are very disappointed,
because gold itself is up 45% over
this same period of time and the HUI hasn’t adequately leveraged its
gains.
To delve into this vexing
conundrum, a couple weeks ago I updated my research on HUI leverage to gold. It showed that leverage varies wildly
over the course of uplegs, so it is pointless to
worry about mid-upleg. Like the weather, it will soon
change. As I was doing this
leverage research, some fascinating peripheral insights into the technical
structure of HUI uplegs became apparent.
Over its entire 1237% bull
market since November 2000, the HUI has completed seven major uplegs and seven major corrections. I’ve studied these segments in
depth over the years. Analyzing
their gains, durations, rhythms, and leverage offers priceless probabilities
knowledge to help maximize our odds of realizing big profits in today’s
and future gold-stock trades.
The HUI’s
seven major uplegs of this bull have coalesced into
a very distinctive alternating pattern.
First massive uplegs drive the HUI to
dizzying new heights, catapulting it over 100% higher in less than a
year. Then smaller consolidation uplegs follow, giving traders time to get comfortable
with the new higher prevailing gold-stock levels. I recently discussed this critical pattern in depth.
The 2nd, 4th, and 6th major
HUI uplegs of this bull market were massive,
averaging stellar 136% gains over just 9 months each! The 3rd, 5th, and 7th were
consolidation uplegs, averaging much more modest
47% gains over about 9 months each.
Since the 7th upleg which ended last July
was a consolidation upleg, today’s 8th upleg which started
in mid-August is almost certainly going to prove massive.
Looking back at this
bull’s past massive uplegs, traders goggle at
their incredible 145%, 125%, and 137% absolute gains. Although fantastically profitable for
us as we rode each one, hindsight tends to dull their myriad of real-time
challenges. None of these massive
uplegs offered a smooth ride, and they tried
relentlessly to shatter traders’ confidence and shake them out before
the uplegs matured.
Now today in the midst of
the HUI’s 8th major upleg,
traders are yet again grumbling and scared. Many have given up on gold stocks,
losing the psychological battle against this wily upleg. This is very unfortunate, as people
who lose faith too soon always miss the best gains an upleg
has to offer. I don’t think
traders would defect so easily if they understood HUI upleg
structure.
While no two massive HUI uplegs are identical, they share many similar internal
technical traits. But these
symmetries are not readily apparent at first glance. Past massive HUI uplegs
occurred at very different prevailing HUI levels and ran for different
durations, leaving them difficult to directly compare. Yet if they can be rendered in
comparable terms, they offer a wealth of insights critical for today’s
gold-stock traders.
In order to compare the HUI’s massive uplegs 2,
4, and 6 with each other and today’s upleg 8,
I indexed each one individually. They all start at 100 and rise
accordingly, so at 150 for example each is up 50% from its own starting
point. Indexing neutralizes the
disparate HUI levels prevailing during each upleg
to make their gains, losses, and internal technical structures perfectly
comparable with each other.
Even indexed though, these uplegs still had different durations. You can’t render them on a
common time scale without adding fake data to shorter uplegs,
deleting real data from longer ones, or interpolating middle ground to force
a common fictional duration. These
data-manipulation approaches are all unacceptable. Thus to maintain pure data integrity,
I simply lined up each massive upleg’s ending
points.
In addition to indexing the
HUI individually for each of its massive uplegs, I
also indexed gold over each HUI upleg. It is rendered as the lighter shadowy
line trailing each bold HUI line.
The HUI’s behavior
relative to gold is exceptionally relevant today since leverage is such an
intense prevailing concern.
The horizontal axis in
these charts is measured in trading days. 21-day increments are used since this
is the average number of trading days in a calendar month. Thus each background grid box is
essentially one month in duration.
I suspect this unique analytical perspective will radically change the
way you look at today’s much-maligned HUI upleg.
Gold-stock traders’
fondly idyllic reminiscences about massive uplegs
2, 4, and 6 are incredibly tinted by rose-colored glasses. Just like today’s upleg, these past massive HUI uplegs
were very challenging to trade in
real-time. Yes their ultimate
gains were enormous, but these gains weren’t achieved in a nice linear
fashion. They were won in fits
and starts which trampled the faith of all but the most stalwart.
Massive uplegs
are anything but clean easy runs.
Their internal technical structures are a chaotic combination of sharp
rallies, sideways drifting, and even downward-trending consolidations. The average trader gets really excited
during the sharp rallies, but quickly loses faith during the drifting and
consolidations. Traders need to
learn to expect mid-upleg weakness even within the biggest uplegs.
Each of these massive uplegs rendered above had two serious
consolidations. These
consolidations dragged the HUI lower for periods of time long enough to be
very psychologically damaging to naïve bulls. They typically lasted about a month
each, but could drag on for six weeks at worst. Four to six weeks of downward-drifting
gold-stock prices despite a strong gold price really tests traders’
resolve.
These mid-upleg consolidations are necessary and healthy because they bleed off excessively bullish sentiment
generated from the sharp moves higher that precede them. The biggest threat to any young upleg is too much greed too soon. These consolidations are a safety
valve to prevent popular greed from growing too extreme before an upleg nears maturity. They offer the best mid-upleg buying opportunities.
Another crucial structural
attribute of massive HUI uplegs is readily evident
in their final two months before topping. About two months ahead of their
dazzling apexes, each upleg carved an interim low
which I marked above. Then in
those final two months following these lows, each upleg
rocketed to fantastic terminal gains.
Being long and strong heading into an upleg’s
final two months is crucial to maximize trading gains.
Massive HUI uplegs 2, 4, and 6 respectively gained an absolute 55%,
36%, and 38% over their final two months alone! This final-two-month surge represented
60%, 47%, and 48% of each upleg’s entire
gains! Thus on average over half of each massive HUI upleg’s entire
gains occurred in just its final two
months!
Traders shaken out by the
pair of serious mid-upleg consolidations prior to
these incredible terminal gains miss the
majority of each massive upleg. Thus I can’t emphasize enough
how important it is to ride these massive uplegs to
maturity. You’ll know
maturity is nearing when the HUI rockets vertically in a matter of weeks and
everyone and their dog is ridiculously bullish on gold
stocks. Euphoria is impossible to
miss.
With this superior
understanding of past massive HUI uplegs’ general
structure, today’s likely-massive HUI upleg 8
will make a lot more sense. On
this next chart I added the HUI’s indexed
performance since the mid-August low, its 8th major upleg. But since today’s upleg hasn’t yet ended, I ran its chart out to May. Why May?
Provocatively mid-May to
early June is the highest-probability topping point for major uplegs in this HUI bull by far, with three of seven
topping then. Also, if
today’s upleg 8 runs for the average massive upleg duration of 9 months, then it ought to top right
around 9 months from its mid-August birth, which is mid-May. There are a variety of research
threads pointing to a probable May apex for today’s HUI upleg.
Assuming today’s 8th
major HUI upleg indeed proves to be massive, and
assuming it tops sometime between now and late May, it really looks pretty
normal in technical terms compared to its predecessors. It had a sharp initial rise and has
weathered two serious consolidations that have really shaken the faith of
many gold-stock traders.
The HUI’s
first mid-upleg consolidation started off its early
November high, when it began grinding lower into mid-December. This nasty consolidation nearly
dragged the HUI back down to its 200-day moving average, which really spooked
a lot of traders. This retreat,
combined with the fact that gold remained strong, severely damaged the
confidence of gold-stock traders.
Many capitulated near the mid-December low.
But just then when fears
were rivaling those witnessed during mid-August’s major interim low, the HUI surged higher
heading into January. This
restored confidence for a season.
But by mid-January the HUI once again started drifting lower in its
second serious consolidation of this upleg. This one was so hard psychologically
that I had some long-time gold-stock traders tell me they’ve never felt
worse in this entire bull!
But as this comparable
graphical perspective on massive HUI uplegs
reveals, serious consolidations running four-to-six weeks are merely par for
the course. We should expect two within each massive HUI upleg.
Gold-stock traders who have somehow come to expect that the HUI must
rise continuously or follow gold perfectly day in and day out will be sorely
disappointed. Massive uplegs deftly shake out weak hands with their chaotic
structure.
Since most traders tend to
succumb to the tyranny of the short term, these consolidations are really
frightening. Their technicals tend to form full-blown downtrends over their
duration, complete with lower highs and lower lows. So the HUI can really start to look
scary technically late in one of these serious consolidations. Yet if traders took the long view
instead, they’d still see higher highs and higher lows over multi-month
time horizons.
Provocatively if
today’s HUI upleg tops by late May in line
with the probabilities, we are nearing its final two months. The dotted-blue line above shows a
stylized view of the HUI’s probable
trajectory during the time between now and May. If this massive upleg
follows precedent we ought to see slightly more than half of its total gains
between now and May! The terminal
ascents in massive HUI uplegs are simply awesome.
The past three massive uplegs averaged 136% gains, or 236 indexed at their
tops. If today’s HUI upleg proves merely average, a 136% gain since its
mid-August birth would take us above 700! Lest you think this 700ish HUI target
is new and situational, I was already writing about it back in September when this upleg wasn’t even yet one month old. Later HUI/Gold Ratio analysis confirmed it
from a different angle.
For a variety of reasons
though, I doubt this upleg will prove merely
average. Look at the
shadowed-blue indexed gold line above.
Gold is now enjoying its best upleg of its
own bull. The higher gold gets,
the more interest it drives in gold-stock investing and speculating. Gold is getting so impressive that it
is starting to attract massive pools of mainstream capital to consider gaming the tiny gold-stock sector.
Also, the HUI has largely
lingered in fear since the summer of 2006. Sentiment is so unbelievably negative
in gold stocks, and it has been so long since they’ve experienced
popular greed, that their blow-off terminal surge this time around should be
gargantuan. The markets abhor
excessive fear and few sectors are more overdue for an episode of extreme
greed than the long-loathed gold stocks.
Thus today’s HUI upleg 8 could easily prove to be this index’s
biggest massive upleg yet before it fully runs its
course. We are witnessing some of
the most bullish gold-stock and silver-stock conditions today that I have
ever seen. Thus at Zeal we are
aggressively adding trading positions in our newsletters in
anticipation. If history proves a
valid guide, the coming months in the HUI should be nothing short of
legendary.
I made one final chart
using these indexed massive uplegs. This time instead of lining up their
apexes, I lined up their starting points. This common-starting-point approach
really startled me. Today’s
widespread perception that this upleg is pathetic
and horrible compared to past massive uplegs couldn’t be more wrong. Believe it or not, today’s HUI upleg 8 exhibited the best early massive-upleg performance by far!
For most of its first four
months of existence starting off the mid-August low, today’s upleg performed much better than any previous massive upleg. Considered
in trading days since launch, upleg 8’s gains came in faster and bigger than
anything yet seen in this bull. This
is pretty amazing considering how widely reviled upleg
8’s performance seems to be today.
Interestingly all previous
massive uplegs also witnessed their first serious
consolidation right around their third month in, just like we witnessed in
early November. Around trading
day 63, the three-month mark, every indexed massive HUI upleg
line rendered above is grinding lower.
This makes the November-December consolidation suffered in
today’s upleg seem positively normal.
This upleg’s
second January-February consolidation we just weathered also corresponds
nicely with a similar consolidation at this stage in massive upleg 6. That,
of course, was the fondly-remembered HUI surge that ended in May 2006. It was back then at the top of upleg 6 when greed last waxed extreme in gold
stocks. For almost its entire
lifespan, our current upleg’s gains have been
superior to upleg 6’s.
So today’s
perceptions that something is dreadfully wrong with the HUI are largely
misplaced. In perfectly
comparable indexed terms, it is as good as (and superior to in some ways)
previous massive uplegs to this point. Even today when the HUI is perceived
as lagging, it remains right between the tracks of uplegs
4 and 6. We are well behind upleg 2 today, but that
fastest massive upleg of this bull had already gone
terminal by this point. It was
something of an anomaly.
Structurally the HUI looks
just fine today despite all the fears plaguing it. Traders should be excited that this upleg’s internals match what past massive uplegs have exhibited to this point. While I’ve long expected this upleg to be massive since the last upleg
was not, this internal technical structural perspective really buttresses the
massive case.
It is true the HUI hasn’t yet leveraged gold significantly in
this upleg.
This is evident in the narrow spread in this chart between the
bold-blue HUI-indexed line and the shadowed-blue gold-indexed line. I don’t expect this
underperformance to persist though.
HUI outperformance of gold is highly
cyclical and we are overdue to see another episode soon per HUI/Gold Ratio analysis.
And if you compare all the
shadowed lines above to see gold’s indexed performance in these massive
HUI uplegs, it is readily evident that gold is now
dwarfing anything that came before.
If gold is this strong, I almost can’t imagine how big the HUI
surge will be when it suddenly decides to catch up, leverage gold, and
account for gold’s new prevailing levels. No other massive upleg
has had such a strong gold base.
I’ve actively traded
this gold-stock bull since its birth in late 2000 and I can’t recall a
more bullish setup for gold stocks.
Probabilities really favor the next few
months being amazingly profitable for this long-neglected sector. As such, we’ve been aggressively
adding elite high-potential gold-stock and silver-stock trading positions in
our acclaimed weekly and monthly newsletters.
In the 87 months this
gold-stock bull has powered higher, only 6 have witnessed the
hyper-profitable final two months of massive uplegs. These terminal ascents are pretty
rare. But odds are we are in for
2 more of these months soon. If
you want to ride them, subscribe today and deploy your
capital before it is too late. If
precedent prevails, our subscribers mirroring our newsletter trades should
earn fortunes.
The bottom line is massive
HUI uplegs have many internal technical
similarities. This common
structure includes two serious mid-upleg
consolidations and a sharp surge in each upleg’s
final two months that accounts for about half of its overall gains. By understanding HUI upleg structure, you can avoid being shaken out by the
consolidations and make sure you are fully deployed for the exciting climax.
Today’s 8th major upleg is really exciting because
its technical structure to this point matches past massive uplegs very well.
Thus it will almost certainly prove to be massive too. And if this is the case, we ought to
see at least as big of advance heading into May as we’ve already
witnessed since August. But given
gold’s extraordinary strength, the coming gains as the HUI starts
reflecting it could be much larger.
Adam
Hamilton, CPA
Zealllc.com
February
22, 2008
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