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Shhhhhh!
Don’t look now but the Amex Gold Bugs
Index just moved to fresh highs. The index closed at 405.26 on Wednesday
10/10, surpassing its May 2006 high of 401. Based on the lack of excitement
and publicity our guess is more to come.
Chart 1 -
HUI breaking out
Now mind you, a move to new highs is never a
fait a compli that a breakout is at hand. Heaven
knows we have endured many false breakouts over the years.
There are a few technical analysis tools one
can use to determine if a breakout is for real. The most popular is a daily
close 3% above the breakout level (about 414 in our case). The
other is 3 consecutive daily closes above the breakout level. In effect, both
indicators are a means of gaining confidence either through price or time.
Incidentally, we find it difficult to buy
breakouts for this very reason. We never know if they are for real. We prefer
to bottom pick oversold stocks – but that’s just our style.
So IF we are seeing the long awaited breakout
(and it is a big IF) lets indulge ourselves and calcualte
a few potential targets.
How high
will the HUI go?
Based on our Fibonacci extensions we expect
750 within 6 months to a year.
How do we arrive at that? We take the
magnitude of the previous wave up (165 to 401 which is a 143% move). We
multiply that by the Fibonacci ratio of 0.618 to arrive at a potential wave
magnitude of 88%.We then extend the top of the last wave (401) by 88% to get
750.
We say 6 months to a year because all preceding up
waves have been around that duration.
Now let’s get really speculative!
How about
a long term target Greg?
Chart 2 -
HUI bull market
A technical difficulty in projecting a
long-term target (based on the existing wave structure) is that it is not
clear when Major Wave 1 ended and Wave 2 began.
For example, did the 2-year correction
between 2004 and 2005 represent the end of wave 1 or did the top in May 2006
represent the end?
Our feeling (and it is just that) is that the
entire period from 2004 to now represents a rolling correction and the end of
major wave 1. We base this on the fact that these correction periods were
longer than the intermediate corrections in 2001 – 2004. That is, the
money presses were churning at a consistently high rate between 2004 and now
and the yield curve was flattening over the period. As opposed to now when
the yield curve is widening again.
That said, we calculate our target by taking
the magnitude of Wave 1 as 401 – 35 or 1000%. Multiply by the Fibonacci
ratio 0.618 and we arrive at a projection for this wave of 646%
Great Greg! So how about the target?
Wait for it!
We think 3,000 is
achievable by the end of 2009 (401 x (1+6.46)). That will mean several stocks
rising 5x or greater.
Now we all know why we’re here! More commentary and stock picks follow for
subscribers…
Click here: http://blog.goldandoilstocks.com
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This article is intended solely for information
purposes. The opinions are those of the author only. Please conduct further
research and consult your financial advisor before making any
investment/trading decision. No responsibility can be accepted for losses
that may result as a consequence of trading on the basis of this analysis.
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