Gold: Bloated Intermediate Cycle - HUI: We're Close Now

Another fast post on the endlessly entertaining movement of gold and the HUI gold miner's index. I've come to the indifferent conclusion that gold's first C-wave intermediate cycle is about to finally bottom. I know this sounds bad, but if price can now trade just a tad below $1626 I think that may well be the end of what I can only characterize as the most bloated intermediate cycle in the history of gold's secular bull.

Click on any chart to ENLARGE

8 daily cycles - if that is how this is understood in retrospect - is whacky. But this entire structure looks like a single intermediate cycle to me and hopefully will conclude with a very typical 61.8% retracement. 

The upper indicator is the Money Flow Index. I have never been able to prove to my satisfaction a little theory I have about the MFI but I'll share it with you just the same. I have a concept in my mind of a dry sponge - this is what I picture when the MFI (10) has a very low reading - like below 30. And then the sponge begins to soak up some water. In our case, it is buyers taking positions as the indicator begins to rise. But the stock price does not rise. Not yet, anyway. Then as the sponge gets about half saturated price begins to take off. The sponge fills more until it is utterly saturated and price continues to rise. 

Anyway, I have also noticed that a reading of about 50 seems to indicate that there are enough investors in for the longer ride that they are very unwilling to sell just because price takes a quick dip. That may sum up where I see gold with respect to money flow right now. The indicator is like a sponge saturated with water and price has not (yet) rewarded the faithful.....but it will.

The True Strength Index indicator TSI (7,4) shows that a bearish trend line break sell signal was generated today. However, the descending TSI trend line of the past couple months will be available for breakage just below the ZERO reading and that is going to yield a powerful BUY signal.

The HUI gold miner's index is looking like a roll of the dice very short term. The TSI setup could turn into a positive divergence BUY signal or a trend line break (TLB) SELL signal. Being an optimist I hope 372.7 price level is not breeched and this goes down as I wrote about a couple of posts ago.

We should find out how all of this is going to turn out by the end of the week, if not sooner. As far as I can tell, it should turn out GREAT!

GDX Strategies Revisited

Last fall I spent an exorbitant amount of time writing strategies for trading Market Vector's Gold Miner ETF (GDX) using the ThinkorSwim trading platform. It has become one of those projects that never seems to get finished, at least not to my satisfaction. I would like to get this code entirely written over to my other trading platform (TradeStation) where the opportunity for extensive optimization and back testing should complete the project. 

Anyway, as my present interest seems to be circling around the mining sector, I thought it would be fun to see how the strategies have been doing to date. So, I loaded up each of 9 long strategies one at a time in ThinkorSwim, set the back test results to begin with the first day GDX began trading in May 2006, and let the computer do the rest. Meanwhile, I made a table with various headings to record the results as shown below.

GDX Strategy Name (LONG STRATEGIES)		Total Trades	Win %	Largest Winner	Largest Loser	$ Profit Per Trade	$ Profit May `06 - now	Current Signal
1.	Gaps	89	83.14%	$405	$366	$  60	$5,318	Buy	01/25
2.	Linear Regression	44	70.45%	$763	$753	$  99	$4,378	Buy	01/25
3.	PercentB	32	96.97%	$488	$81	$134	$4,291	Buy	11/26
4.	Step_MA	48	81.25%	$455	$1070	$127	$6,075	Sold	01/29
5.	Force Index/TSI	12	75.00%	$1075	$174	$336	$4,033	Buy	02/01
6.	TSI	27	66.66%	$735	$220	$225	$6,081	Buy	02/08
7.	Ulcer Index	34	52.94%	$551	$307	$174	$5,925	Buy	02/05
8.	VZO	19	73.68%	$828	$303	$295	$5,606	Sold	08/24
9.	Pivot Point	132	78.78%	$463	$784	$  63	$8,354	Buy	01/25

          GDX                                                                                                      $357

GDX opened for trade on May 23, 2006 at $38.75 and closed last Friday February 8, 2013 at $42.32. The buy and hold for nearly 7 years yielded a gain of $3.57 (9.2%). Assuming an initial purchase of 100 shares (my strategy's data above is for the use of 100 shares only) the buy and hold profit to date is $357.

This post will simply provide a bench mark for the strategy's performance to date that we can look again at some time in the future. 

Also, I was curious to see not only each strategy's winning percentage, but also what kind of signal each was giving right now. It turns out that 2 of the 9 are out of GDX and in cash. The other 7 strategies bought GDX within the past two weeks in the $42 range with the exception of the PercentB strategy which has been holding long since November at $48.50.

Hummm...... what is the chance all 7 strategies are wrong? I guess that will be something to write about next time.

HUI Miner's Index - We've Seen This Before, Too

Last month, when I sensed that gold bugs were about to lose their lunch over the price movement of the US Dollar, I offered a post that should have relieved their anxiety a little. In hindsight it appears my analysis was correct (fortunately).

The present anxiety seems focused on the HUI miner's index and it's frightening under performance of seemingly every asset class and market sector imaginable.

This post will make the case that the HUI is behaving exactly within the historical context of it's bull market and should be relatively near it's ultimate low both in terms of price and timing.

I will admit that the most recent 4 months, in particular, have indeed been agonizing. Painfully agonizing. But viewed in the context of similar HUI setups, such as occurred in January - March 2003, March -May 2005, September 2006 and July 2007, perhaps one can recognize our present situation as something we've not only seen before, but also have every sensible expectation for a bullish resolution.

To get to the specifics, let's look at some weekly charts of the HUI miner's index from the inception of its bull in late 2000, track the major rallies and retracements right up to our current 2013 time frame, and see if my optimism appears justified. Sound good?

OK, let's begin with this weekly chart of HUI which covers the initial window of time (2000 - 2003).

Click on any chart to ENLARGE

What we see is a powerful rally that appreciated from $35.31 to $154.99 (a 339% gain) and then retested a 50% retracement one time.

Our next chart puts the action of latter 2002 through 2005 into view. Using the test of the 50% retracement in the previous chart as our low, we see another powerful rally that yielded a low to peak gain of 179%.

What we also observe is that the 50% retracement of this enormous rally was tested not once, or twice....but three times. We also measure that price rebounded northward off the 50% retracement level to yield a 48.5% gain - which was entirely taken back with a third test of the 50% level.

The next mega rally is seen in the following chart spanning all of 2005 - 2007. 

Again, I have used the 50% retracement level of the previous rally to spot the low of this rally. We see another awesome gain of 142%. We also note some gyrating bounces off the 50% retracement of this rally that provide gains in the neighborhood of 37%. 

Curiously, we also have three tests of the 50% retracement - as we saw in the previous chart. Equally curious is the placement of these tests. The first two are somewhat close together on the left side of the consolidation while the third test is the concluding low. 

Our next chart gives us a clear view of how the HUI behaved in 2007 - 2010. A strong rally off the previous 50% retracement level provides a healthy 82% gain in just under 7 months. 

This rally retests the 50% retracement three times - each 6 weeks apart - then the unthinkable happens.....the bottom falls out and price plummets. The eight year cycle low in gold and the massive deflation occurring in the financial markets inflict massive damage on the mining sector (and every other sector, for that matter).

And of all things, the 50% retracement level that would otherwise be expected to hold price at $400 in the consolidation phase became the exact retracement level that eventually held price from falling much below $167. (Price stopped falling at the 150% level on the chart above).

Well, it's time to look at the most important chart of the day. This is the weekly HUI miner's index from 2008 - 2013.

Wow - look at that 325% gain!

But hold on.......there is that 50% retracement metric again. 

And the 40%ish rebound that always seems to get taken away just as the bulls think they have it in the bag, again. 

And three retests, again. Right at the 50% level.

And the curious placement of the retests. The first two on the far left and a final 'blow your mind' at the far right just as the consolidation comes to its exhausting conclusion. 

Hummmmm....... are you thinking what I'm thinking?

Well, in case you are not sure, here is what I am thinking: the HUI has yielded 5 huge rallies during it's bull to date. Each retraced 50% before beginning a new rally, except for the 2008 example which tried to hold the 50% level and failed. Several rallies featured a 'fake out' rebound sporting a gain in the range of 40%. And the final or third retest of the 50% retracement level always located the genesis of the next huge rally. Well, except for 2008, that is.

I really don't think this is 2008 all over again. Not with the world's Central Banks devaluing their currencies as aggressively as they are. And, we are years before gold's next 8 year cycle low is due.

So, I think we are at the tail end of another HUI consolidation that, like all the others, will catapult the miner's index hundreds of percent higher over the next year and begin not too long from now. 

And as I have become fond of saying, it is a bull market, after all.

US Dollar - We've Seen This Before

This post will be brief as I haven't time this morning to write much.

The US Dollar (/DX) is most likely playing a familar game with investor's psyche at the moment. Here is a chart of the buck from 2010 to present. 

Click on any chart to ENLARGE

A close look at the action in January 2011 shows us a hair raising nail biting encounter with the dark force that lasted all of 3-4 days.

And so, here we go again - but perhaps things will settle down sooner than 'last time'.

The bull will win any battle he choses to get involved with, but on his own timetable. And remember, it is the bull's market.

TSI Standard Deviation Indicator: Gold Ready to Rocket

First of all, I wish to thank my friend and colleague TrendXplorer (outstanding website IndexSwingTrader) for making publicly available the ThinkorSwim code that I reworked for use with the True Strength Index (TSI) indicator in this post. If you are interested in reading more about this indicator from his website, click here.

The indicator we will look at in this post is the TSI (7,4), but with an interesting twist. The twist is that while the shape of the TSI is normal, the scaling seen on the far right side of the indicator is different. Quite different.

What this hybrid of the TSI does is consider the readings of the TSI over the past 200 weeks and then figures out the mathematical standard deviations of the TSI readings. 

So in this case, a measurement of zero is the mean. 

And we should not be surprised to observe that the TSI spends a lot of time - a lot of the 200 past bars - very closely just above and below ZERO.  Readings in the range of, say 35 or -35, are not as common as those nearer ZERO. Not surprisingly this hybrid TSI identifies these less frequent readings as being somewhat above or below the mean - perhaps near the 1.0/-1.0 standard deviation level. And so on.

Let's take our first look at this new hybrid TSI with a 15 year weekly chart of the gold futures (/GC).

Click on any chart to ENLARGE

The TSI indicator is colored purple when rising and gray when falling. The horizontal red line is the mean (ZERO). 

The bigger picture perspective this chart provides is a sense - over 15 years - of how often the TSI reaches either 2 standard deviations above or below the mean. And just as importantly, once it reaches such an extreme, how long does it stay there?

My other chart for this post gives us a closer look at the current situation. We would be hard pressed to find more than 5 times in the past 15 years the TSI nearly reached the -2.0 standard deviation. Yet look where we are now.

Gold has been turning north this evening and the  current TSI reading has changed color from gray to purple - indicating that momentum is beginning to bullishly reverse direction.

Of course, anything can happen from here. But for what its worth, this standard deviation reading of the TSI tells me gold is ready to rocket.

Fingers crossed.

Gold: So Far, So Good

Things have gotten a bit more complicated since I wrote my December 19th post 'Where's the Fire?', but I continue to ask the same rhetorical question and am somewhat amazed at the 'freak out' all around me. Yes, things have been strange lately with the gold and dollar behaviors but I don't think without a decent explanation which I will offer in this post.

One of the things I have quietly been puzzled by is the lack of a credible trend line break of gold's intermediate cycle begun on May 16, 2012. I have been unable to find a single intermediate cycle that did not have a trend line break - and I have looked at all 31 previous intermediate cycles. So, for starters, I have been waiting to see if this event would occur and as of a few hours ago, it finally did.

Click on any chart to ENLARGE

I chose 6/28 and 7/12, along with the origination low of 5/16, to draw the intermediate cycle trend line. There were conflicting lows to chose from, as I am sure you will note, but my choice gave me two lows, not one, in alignment with the 5/16 low.....and that seemed as good an argument as any for my choice.

Some of the curious items: 

1. This intermediate cycle has, as of today, measured 165 days. Until now, the longest intermediate cycles occurred in the 2009 C-wave and were 148, 131 and 120 days. In 2007 the C-wave leading up to the 2008 parabolic included a pair of intermediate cycles that measured 128 and 127 days. The longest intermediate cycle in a D-wave was in 2008/09 at  123 days. 

(See my December 28th article 'The Microscope on Gold's ABCD Pattern and Intermediate Cycles' for details).

2. This intermediate cycle began with a daily cycle that peaked on Day 15 and concluded on Day 31 - the definition of a left translated cycle. No other C-wave has begun with a left translated daily cycle.

3. This intermediate cycle has included 7 daily cycles nested within its massive structure. No previous intermediate cycle has used more than 6 daily cycles. 

4. Every C-wave intermediate cycle top was followed by a left translated daily cycle with a couple of exceptions (3/2/2006 and 6/6/2011). Not this one. This intermediate C-wave cycle topped on 10/5/2012 and the following daily cycle topped on 11/23/12 and was right translated.

Turning to a 60 minute chart for a closer look at the trend line break of the intermediate cycle and the trend line break that just missed on December 20th, we have this chart (below).

There has been some speculation that the U.S. Dollar Index is presently suffering from an aborted intermediate cycle that was expected to be bearishly left translated but has now got a whole new attitude.

I'll admit that it is a screwy situation, that is for sure.

But this is what I see.

The dollar began a new intermediate cycle on February 29, 2012. It peaked on July 24 (day 61) and bottomed on September 14 (day 99).

This was followed by a shorter intermediate cycle that peaked on November 16 (day 45 - /DX 81.515) and bottomed on December 19 (day 68).

This shorter IC peaked much lower than the previous IC - thus the lower highs concept of a change in trend direction. BUT, this IC was also bullishly right translated and did NOT make a lower intermediate cycle low than the previous IC. We would expect (if not demand) that this IC would make not only a lower high but also a lower low. This means to me that my IC explanation is suspect.

You understand why I characterize this situation as screwy, right?

Holding on to the concept that cycles break their trend lines before moving on to a new cycle, you will note the purple dashed lines I have drawn on the chart above. Clearly, the IC trendline begun on September 15 has been broken.

Anyway, I offer another possible interpretation: this IC did not conclude early on day 68, but is still ongoing. If it should bottom below the pricepoint where I have put the '99' (/DX 78.725) and do so after the 90th day (defining a left translated IC - as expected) then everybody would probably be real happy. Oh, lest I forget....it would also be required that the 81.515 current high for the IC not be surpassed to the upside.

I see that the dollar is presently stuck at the precise price level of the left shoulder top of the head and shoulder's pattern there has been so much talk about. Perhaps traders are a bit dumbfounded about what comes next as the rest of us?

Well, I say, hang in there. For the FED to be buying 80% of the US Govt debt (because there are no other buyers, obviously) and then infer that they will stop this practice sometime before the end of 2013 is the idiocy of all statements I could ever imagine. They are dreaming and hope you and I believe the dream - while they have transferred all the debt of the private sector's mistakes onto us, the public taxpayers. Ha ha. I say bullshit.

And besides, it's still a bull market!

John
tsiTrader@gmail.com

True Strength Index (TSI) Compression Patterns

Just for a change of pace I'd like to show you some new techniques for using the True Strength Index (TSI) indicator to generate timely BUY and SELL signals. These techniques involve 4 different patterns that the TSI may form before a powerful breakout occurs and prepare you to be on high alert in advance. I call these general patterns 'compression' patterns and as you will see, the TSI indeed can be compressed in such a manner with respect to the movement of price that the change in price trend direction becomes obvious very quickly once the TSI compression is released.

The names I have given to these compression patterns are: wedge, bullish, bearish and ZERO line.

Let's now look at an example of each, beginning with the wedge compression.

This daily chart of the U.S. Dollar Index (DXYO) is a classic example:

Click on any chart to ENLARGE

The bullish TSI compression uses a tactic of rising TSI lows as price consolidates. I also refer to this technique as 'stealth' because the rising movement of the TSI lows is quite unseen by traders (who do not read my blog, that is).

The bearish compression pattern of the TSI is one in which the TSI makes a series of lower highs and lower lows - a descending channel - while price appears to be generally rising. 

Like each of the compression patterns, the bearish pattern takes time to develop. However, if one knows to look for this it can be seen some time before it detonates price (which offers a decisive trading advantage). 

And finally, let's have a look at the ZERO line compression pattern. This one, somewhat like the wedge pattern, can be either bullish or bearish. But in this case one knows in advance which it is - because it depends whether the TSI is above ZERO and being repelled (eventually bearish) or below ZERO (bullish as in the chart below).

The key point to always try to keep in mind is that as long as the TSI is above ZERO, and especially when it is rising, price is always rising. And just the opposite for when the TSI is below ZERO (as in this chart of GDX). 

Well, now you have some new tricks to use when making your next trading decision. Go get 'em!

John
tsiTrader@gmail.com