HUI Gold Bug Index - A New Line in the Sand (?)

It has always intrigued me how various moving averages, trend lines drawn on price and even trend lines drawn on technical indicators seem to have an almost magical spell over the ensuing price movement. This post will show you a new trend line that has appeared on the weekly price movement of the HUI Gold Bugs Index and I suppose we could think of it as the next 'line in the sand'. Whether there is any magic with this particular line is something we will all find out and soon.

We'll take a look at this trend line from a distance and up close, as well as take a peek at some new True Strength Index (TSI) indicator adaptations I have developed specifically for looking at the HUI Gold Bugs Index, and conclude with a chart and thoughts regarding the price movement of the Gold Futures (/GC).

I found this new HUI trend 'line in the sand' on the weekly chart when using the setting for log scaling. The endpoints are the 2000 and 2008 lows and the line is simply extended after 2008.

Click on any chart to ENLARGE

A little later we will take a closer look at this chart on the daily time frame to see just how close price is to reaching this trend line. 

But before we do I think the weekly TSI (7,4) shown in the lower indicator panel (above) is interesting. It shows the 4 most extremely negative momentum readings of the HUI in the past 15 years - 2000, 2004, 2008 and 2013. 

Our current reading, at -85.11, is a record breaker. Can you say 'over sold'?

And I think the appropriate question when looking at this information is whether these 4 extremely and historic readings were good times to BUY or good times to SELL? (Read my mind if unsure of the answer).

Here is a closer look at HUI using a daily chart with the trend line rising in blue in the lower right corner. It appears price is just a matter of 5-10 points from reaching this trend line at 335.0. The TSI indicator shows that a "picket line" BUY signal has been setting up for a while, but we are not quite there yet.

The following couple of charts of the HUI display a couple of customized uses of the TSI indicator. The top indicator panel shows the TSI (25,13) of each mining stock (16) that comprise the HUI index. The lower indicator panel considers the movement of each stock's TSI - whether rising or falling and whether above ZERO or below ZERO - and by assigning a different value for each condition a histogram is plotted.

If all 16 stocks have a TSI that is both rising and above ZERO, the histogram reaches +32. For the opposite condition, -32. 

Here is the weekly, followed by the daily.

And finally, here is a chart of daily gold futures (/GC). The TSI (7,4) is set up nicely for a trend line break BUY signal with a modest uptick in price.

The most recent Commitment of Traders (COT) reports regarding gold have been extremely interesting and have an explosive component already loaded and locked into place. You have the smartest of the bunch, the commercials, positioned for gold being at the bottom of this lengthy correction. They are hedgers by nature and quite literally always net short of gold.....but it is the degree to which they are short that tells their story. At present their net short position is minimal and very similar to their correct positioning at the 2008 bottom. The commercials have apparently seen no reason to increasingly hedge their long positions with gold in the $1575 area. Which is also to say that they are not terribly concerned that gold is going much if any lower.

Meanwhile we have the Managed Money group who has had a considerable long gold position for some time but recently has been adding thousands and thousands of shorts to their position. They have not been selling their long contracts - rather they have been hedging their long contracts with these shorts, presumably on the fear that if the bottom falls out at $1523 their long positions will be protected. Perhaps we could think of their excessive short positioning as 'enthusiastic insurance' purchases. 

And a post or two back I noted that when this group (Managed Money) has built a huge short position they have always done so at exactly the wrong time.

So picture this. The commercials are the ones, if anyone, who actually have bullion. Do you seriously think the Managed Money group has any bullion? I didn't think so.

So when the Managed Money dopes find out gold is not going below $1523 what do you suppose they are going to have to do with all those shorts they own? Do you think they will deliver the bullion when their contracts are closed or do you think they will become buyers of more paper gold on the long side to cover?

Right. They will become the perfect fuel in the incinerator that burns short paper contracts into charcoal. And all the other groups, including the commercials, will turn up the heat and watch them wither and crackle in the flames. This is the kind of unusual setup that causes those explosive blasts upwards in price one notices once in a while, seemingly for no reason. It is temporarily caused by a lack of liquidity - there are so many shorts running for the door to sell their paper that only when price is 'favorably adjusted upwards and immediately' do the shorts get their trade covered.

It is a bull market, after all. Patience!