Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 11-14-04

Analysis/Commentary -

The NASDAQ Composite (COMPX) opened slightly higher on Friday 11-12, and, COMPX trended higher the entire session, spending nearly the entire session in positive territory, and closed significantly higher at 2085.34, +24.07 (+1.17%).

The long term downcycle trendlines for NDX (NASDAQ 100) and SPX (S & P 500) were broken during the week ending 11-5-04, which is either a long term cycle buy signal or a double top/marginally higher long term cycle high may occur, which would mean that the long term cycle is still heading down. Given the very long term downcycle since March 2000 and the negative NASDAQ Institutional Money Flow nearly every week, the double top/marginally higher long term cycle high scenario appears likely.

The chart below is the latest "wall of worry" chart. Keep in mind the relativistic nature of the wall of worry with VXN (NDX (NASDAQ 100) wall of worry) and VIX (SPX (S & P 500) wall of worry) rising faster in % terms than NDX and SPX fall portending strength and vice versa. The collapse of the wall of worry for both NDX and SPX from late March until late April correctly portended weakness. The dramatic rise of the wall of worry for both NDX and SPX from late April until mid May correctly portended strength in those indices. The collapse of the wall of worry for both NDX and SPX since mid May correctly portended a collapse in those indices. Weakness is likely for both NDX and SPX once their intermediate term upcycles break down, since their respective walls of worry (VXN (NDX (NASDAQ 100) wall of worry) and VIX (SPX (S & P 500) wall of worry)) collapsed recently.

The current "cyclical" short Bull Market has ended (NASDAQ 100 and the S & P 500) after lasting more than a year. "Eerie Nikkei-SPX Parallels" (At Zeal) shows the high degree of correlation between the S & P 500's and NASDAQ's post bubble behavior and that of the Japanese stock market that experienced a bubble in 1989 and remains at much lower levels 15 years later. The NASDAQ appeared to be near an important top based upon the high degree of correlation with the Nikkei's post bubble behavior, and a long term cycle high for NDX (NASDAQ 100) occurred at 1559.47 on 1-20-04.

As one can see in the NDX (NASDAQ 100) charts below, a long term (1 to 3 years) cycle high occurred on 1-20-04 at 1559.47. The collapse of the wall of worry from late November 2003 until late January 2004 and the dramatic trend change in NASDAQ Institutional Money Flow 56 weeks ago to negative/outflows correctly portended a trend change. Given the recent negative NASDAQ Institutional Money Flow, weakness is likely this week, but, an intermediate term cycle buy signal occurred on 10-1 which is the most important consideration.

The short "cyclical" Bull Market (NDX long term upcycle with a long term cycle being about 1 to 3 years in duration for the long term up and down cycles combined) began with 10-8-02's long term cycle low at 795.25 and ended with a long term cycle high at 1559.47 on 1-20-04. The very long term downcycle (3-10+ years in duration) which began in March 2000 probably has about 14 years to go. Paper assets (and hard assets in reverse fashion) tend to have very long term cycles that last about 35 years with about 17.5 years up (1982-2000) and 17.5 years down (2000-2018ish). There were very long term cycle highs (paper asset bubbles) in 1897, 1929, 1965ish, and in 2000 (about 35 years apart on average).

Confirmation of the NDX long term cycle high/Bull Market peak occurred when the straight long term cycle trendline broke down (see chart dated 2-27-04) which confirmed the parabolic trendline sell signal that occurred shortly after the long term cycle high.

NASDAQ Institutional Money Flow (block trading data) "portends" (this isn't a good one week look ahead indicator except when there's a well established multiweek trend and the intermediate term cycle agrees with it) weakness this week ending 11-19 (an intermediate term upcycle is in place however, which is the most important consideration this week) with 3.04% (725) more downtick blocks during the week ending 11-12. This primary fundamental indicator has reliably predicted the NASDAQ's direction, having turned positive in March 2003 after being negative for about three years following the March 2000 bubble peak/very long term cycle high. NASDAQ Institutional Money Flow turned negative again 56 weeks ago however and has generally been substantially negative which has resulted in a sharp decline.

On a positive note there has been very strong NYSE Institutional Money Flow for well over two years which explains why the Dow (value stock oriented) held up much better than the NASDAQ (growth stock oriented) prior to NDX's 10-8-02 long term cycle low. Value stocks should hold up much better than growth stocks since the echo bubbles have broken (long term cycle trendline fails as has occurred for NDX, the NASDAQ 100, and for SPX, the S & P 500).

However, one should wait for a long term cycle low before buying a value stock or mutual fund. There's likely to be a dramatic decline in the US major averages (especially the NASDAQ/growth stocks) now that a long term downcycle is in place (NDX turned down on 1-20-04 after hitting a long term cycle high at 1559.47 and SPX turned down on 3-5-04 after hitting a long term cycle high at 1163.23 BUT a long term cycle buy signal may have occurred during the week ending 11-5-04 OR double top/marginally higher long term cycle highs may occur). This is because after a long term cycle high occurs one MUST WAIT for a long term cycle low (probably will occur as a result of a dramatic intermediate term downcycle plunge) before the long term downcycle will end.

Breadth, a primary fundamental indicator, was positive on Friday 11-12 with NASDAQ A/D at nearly 19:12 in favor of advancing issues and NASDAQ Up/Down Volume was in favor of up volume by more than 2:1.

The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) was a mixed picture on Friday 11-12 with VXN revealing that a significant rise in fear occurred for NDX (NASDAQ 100) but QQV revealed that a significant rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed Timely but Risky on Monday. A short term upcycle was in place at Friday 11-12's close which points to strength on Monday if it remains in place, but it's parabolic rise means that risk is high. Worse than expected economic data may result in weakness.

Williams %R for NDX is in overbought territory (below -80 (near the bottom) on my chart is the (look to) "buy" area (oversold) and above -20 is the look to "sell" area (overbought)) at -8.66 on 11-5-04 (NA on 11-12). An intermediate term (1 to 12 months) cycle trendline buy signal occurred on 10-1-04 for NDX and was confirmed by sufficient upside shortly thereafter. MACD is on a buy signal (above it's moving average). RSI and Stochastics are on buy signals.

A significant rise in fear occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) falling -0.10 (-0.53%) to 18.82 while NDX (NASDAQ 100) rose +16.71 (+1.08%) to 1558.41 which reveals that a significant (0.50-1.99%) rise in fear occurred for NDX because VXN fell significantly less in percentage terms than NDX rose (NDX wall of worry grew) which portends strength in NDX on Monday, and, a short term upcycle was in place at session's end on Friday 11-12. 

A significant (0.50-1.99%, +0.97% rise in QQQ + -2.24% decline in QQV = -1.27% which is a 1.27% rise in complacency) rise in complacency occurred for QQQ (NASDAQ 100 Tracking Stock, +0.37 (+0.97%) to 38.66) on Friday since QQQ rose significantly while QQV fell sharply (QQQ Volatility Index, -0.39 (-2.24%) to 17.03) (QQQ wall of worry shrank) which portends weakness in QQQ on Monday, but, a short term upcycle was in place at session's end on Friday 11-12. 

On Friday VIX (which is now calculated using the implied volatility of SPX (S & P 500) options instead of OEX (S & P 100) options) rose +0.29 (+2.22%) to 13.33 versus a rise in SPX of +10.69 (+0.91%) to 1184.17 which was a very sharp (3-6%) rise in fear for the S & P 500/value stocks (SPX is about 75% value stocks) since the wall of worry (VIX) rose sharply while SPX rose significantly (S & P 500) which portends strength in SPX on Monday, and, a short term upcycle was in place at session's end on Friday 11-12.

The S & P 500 (SPX) is deemed Timely on Monday, but a short term extremely overbought condition could limit upside or lead to weakness. A short term upcycle was in place at Friday 11-12's close which points to strength on Monday if it remains in place. Worse than expected economic data may result in weakness. An intermediate term cycle (1 to 12 months) trendline buy signal occurred on 10-27-04 and was confirmed by sufficient upside shortly thereafter. MACD is on a buy signal (above it's moving average). Stochastics and RSI are on buy signals. Williams %R for SPX is in extremely overbought territory (below -80 (near the bottom) on my chart is the (look to) "buy" area (oversold) and above -20 is the look to "sell" area (overbought)) at -5.83 on 11-5-04 (NA on 11-12). 

The CBOE Put/Call Ratio at an elevated (at or above 0.75 but below 0.90) level of 0.76 at Friday's close points to modest weakness on Monday (the Index Put/Call Ratio at an extremely high 1.15 points to weakness) because it's a reliable non-contrarian indicator of the next session's early action except at extremely high (at or above 1.05) or extremely low levels (at or below 0.50) where it sometimes is also a contrarian indicator (sometimes portends early substantial strength (below 0.50) or a sharp rally following early potentially severe weakness (at or above 1.05), judgement is involved).

The NASDAQ TRIN closed at a modestly bullish level of 0.75 (more activity in rising issues) on Friday which is positive technically. A level between 0.35 and 0.80 is a bullish range for the NASDAQ TRIN because it indicates much more activity in rising issues. A NASDAQ TRIN above 1.00 indicates more activity in declining issues. A NASDAQ TRIN between 1.20 and 1.50 is a clearly bearish "red zone" range because it indicates much more activity in declining issues but not a very oversold condition. If the NASDAQ TRIN rises above 1.50 (oversold condition) you can begin to look for a rally and if it rises above 2.00 that tends to be a reliable short term buy signal (very oversold condition).

Looking at NASDAQ 100 (NDX) Chicago Mercantile Exchange Commitments of Traders - Futures Only (Reportable Positions as of November 2, 2004, NA 11-12), the speculators (hedge funds and other speculators/traders) added an unusually large (> 10% increase in long contracts) 6742 long contracts and covered an unusually large (> 10% decrease in short contracts) 6265 short contracts which portended strength last week (normally contrarian indicator, but the unusually large changes make it non contrarian), but much of the strength may have occurred last week because the data is as of 11-2-04, whereas the commercial traders sold 231 long contracts and covered 92 short contracts which portends modest weakness this week (non contrarian indicator). NDX COT (do an edit then find "nasdaq" in Internet Explorer or Netscape to find it because it's near the bottom)

American Association of Individual Investors (AAII) % Bullish (AAII has been a useful non-contrarian sentiment indicator at extremely low levels below 40% bullish and extremely high levels above 60% bullish.) @ 62.5% bullish last week from 57.1% the prior week is a positive factor for the prospects of stocks during the week ending 11-19-04 because it's at a high level of bullishness. The change in or delta AAII % bullish is also a useful short term/weekly look ahead indicator in addition to the absolute value of AAII % bullish. The sharp rise last week is a positive factor for the prospects of stocks during the week ending 11-19-04 because it's a sharp rise in complacency for this useful non-contrarian sentiment indicator contrarian. For now I'm using delta AAII % Bullish as a non contrarian indicator and I haven't determined exactly what significant changes are versus sharp or very sharp, etc. Since it appears to be strictly non contrarian (so far), I don't have to determine what an unusually large change is where the indicator becomes contrarian. The absolute value does become contrarian at extremely low (0-30% bullish) or extremely high (70-100% bullish) values, at least from an intermediate term cycle standpoint (weeks/months).

Gold & Silver Stocks - HUI Exceeds October 8's Intermediate Term Cycle High (at 239.90) on Friday 11-12

• Gold COT as of 11-9: Speculators - 13,937 long added, 2083 short added, Commercial Traders 14,387 long added, 32,190 short added

• Silver COT as of 11-9: Speculators - 6974 long added, 2248 short added, Commercial Traders 1214 long added, 6232 short added
  

• GLD might actually depress the price of gold because it provides a low cost easy way to own an investment that tracks gold, without having to (fully backed?)
  

• Long intermediate term cycle sell signals on 11-2 for HUI/XAU confirmed?
  

• Last week went much as expected. There was weakness in gold/silver stocks early in the weak, with a short term cycle low occurring on Wednesday 11-10, followed by strength the remainder of the week, with a short term cycle high possibly occurring on Friday 11-12. The short term trading strategy espoused last week worked well. The intermediate term cycle buy signals (occurred 11-5) worked, though it remains to be seen if they'll work well, since they didn't in the previous intermediate term cycle (HUI/XAU's intermediate term upcycles lasted less than 2 weeks), which is a warning sign.
  

• To keep the recent action in gold/silver stocks and the metals in perspective, it's instructive to note that the sharp rise in HUI ended over a month ago, with an intermediate term cycle high occurring at 239.90 on 10-8. The first time that level was exceeded since then was this past Friday 11-12, with a session high at 242.50. Since 10-8's high HUI has risen a grand total of 1.08%. The metals have been playing catch up as they typically do.
  

• The synopsis of my system/work this week is little changed from last week: Reliable lead indicator Newmont Mining and gold are kissing the top of their long term upcycle channels (see 2nd and 4th charts) in place since May 10, 2004, just as they were last week. The best strategy this week is to short term cycle trade only, if at all, because risk is high (one might look to buy a short term cycle low this week and exit after a few days) because risk is high on an intermediate term cycle basis (a few weeks/months). Those trading long should remain long as long as NEM's uptrendline since late July holds (see latest chart), HUI/XAU's long term upcycle channels (see latest charts) remain intact, and the USD's sharply downtrending intermediate term downcycle trendline since early October (see latest chart) remains intact. Buy and hold investors and long term cycle traders can remain long. A major correction lasting 2-4 weeks probably looms following an intermediate term cycle high in the next 1-3 weeks. There's a slew of warning signs which means caution is required on the part of traders. I suspect this will be another short lived intermediate term upcycle for HUI/NEM/XAU, similar to the previous one that lasted less than 2 weeks for HUI/XAU and only 2 weeks for NEM, which is a major warning sign (Intermediate term upcycles for gold/silver stocks typically last about 3-4 weeks with an entire intermediate term cycle lasting about 4-6 weeks or roughly 1 month, hence intermediate term in duration.). All the gory details to follow. If you find that the details are too involved/technical I suggest checking out the annotated charts at the bottom. The cycle channels/trendlines are the basis/crux of my system.

• The most important trendline to watch now, besides NEM's uptrend since late July (a long intermediate term upcycle consisting of multiple intermediate term cycles), is the US Dollar's (USD) sharply downtrending intermediate term downcycle since early October (see latest chart). With the USD hugging it's sharp downtrendline and with NEM and gold kissing the top of their long term upcycle channels, it's obvious there's considerable risk for longs on an intermediate term cycle basis (a few weeks/months).
  

• On top of this consider the fact that the non market cap weighted AMEX Gold Bugs Index (HUI) has only been in a very modest uptrend since 10-8 and it appears that gold/silver stocks are in the process of rolling over prior to a likely substantial decline.
  

• In the latest HUI chart the usefulness of cycles is illustrated. HUI's rise since late July is clearly weakening as can be seen in it's declining rate of ascent. This accounts for the negative divergence between RSI (Relative Strength Index) and price for HUI. The declining RSI since 10-8 versus a higher price indicates that HUI is weakening, which jives with the declining rate of ascent.
  

• HUI should continue to roll over and eventually suffer a relatively dramatic decline toward it's long term upcycle trendline in place since the long term cycle low (at 163.81 on 5-10-04). However, it may not fall all the way to the current long term upcycle trendline, since cycles tend to become more parabolic/sharply rising over time. The long term upcycle trendline is likely to turn up in the near future/next few months.
  

• The bottom line is that, either as a trader or an investor, now doesn't appear to be a good time to go long either the stocks or the metals. Traders should have tight stops based upon the trendlines mentioned in bullet 3 and of course for the stocks being traded.
  

• The dramatic rise in the XAU Put/Call Ratio to 0.79200 (November expiration as of 11-12) from 0.67146 on 11-5 reflects strong accumulation of XAU put options in anticipation of a substantial decline.

• A very important point to make for buy and hold investors and long term cycle traders is: The best time to buy is when HUI and the XAU are near their Bull Market/very long term upcycle trendlines (in place since November 2000 for HUI/October 2000 for the XAU). That is, buy near a long term cycle low (HUI long term cycle low at 163.81 on 5-10-04). Long term cycle lows occur at the very long term upcycle trendlines (see the long term charts below). Of course, you also need to determine those trendlines for whatever gold/silver stocks you're investing in/trading, but if HUI/XAU are near their Bull market/very long term upcycle trendlines, then most gold/silver stocks should be very timely/be close to their Bull Market trendlines.
  

• The next best time to buy is when HUI and the XAU are near their long term upcycle trendlines (or maybe the bottom of their long term upcycle channels, there can be a difference early in the cycle) in place since the 5-10-04 long term cycle lows. Those trendlines are currently at 187ish for HUI and at 89ish for the XAU versus closes on 11-12 at 241.86 for HUI and at 108.59 for the XAU. Therefore, declines of 15-20% in the near future are possible as discussed in previous updates, which means that some gold/silver stocks can fall considerably more than 20%.
  

• Now, the long term upcycle trendlines are likely to turn up in the near future, but declines of 10-15% are still likely even if they do turn up soon. Anyone buying now for investing/long term cycle trading purposes is probably paying at least 10% more than than they should and possibly much more than that (possibly greater than 20%), depending on the stocks selected and their relative strength/volatility.
  

• I believe most investors should trade long term cycles, because they give far too much back between long term cycle highs and long term cycle lows. HUI fell 36.66% from it's long term cycle high at 258.60 on 12-2-03 to it's long term cycle low at 163.81 on 5-10-04, which means that many gold/silver stocks fell considerably more than that, some more than 50%. However, one can do very well (putting it mildly in many cases) with simple buy and hold (secular Bull Market/very long term upcycle lasting about 15 to 20 years) in most cases with gold/silver stocks, assuming reasonably good stock selection.

• An X factor this week (assuming it occurs this week) is the introduction of Streettracks Gold Trust, which is an Exchange Traded Fund (ETF) that's an open-ended fund which will track the gold price, with each unit equal to one-tenth of an ounce of gold. Keep in mind that spike moves are selling opportunities. Never trade based upon emotion. Why would you want to buy when gold has gone parabolic and is kissing the top of it's long term upcycle channel?
  

• I've added a new cycle to my system called a long intermediate term cycle that's comprised of two or more intermediate term cycles. See gold's latest chart for examples of long intermediate term cycles. On May 10, 2004 and in late July 2004 long intermediate term cycles began for gold/silver stocks and the metals. The typical (short) intermediate term cycle lasts 4-6 weeks in it's entirety (from cycle low to the next cycle low) for gold/silver stocks and a long intermediate term cycle typically lasts about 3-6 months, but more research and observation are required. One can see in gold's latest chart that it's long  intermediate term cycle since late July has gone parabolic and is probably about to experience a substantial correction/intermediate term downcycle toward the bottom of the long term upcycle channel.

• Gold/silver stocks were in the midst of a sharp decline on Tuesday 11-2 when the US presidential election occurred. HUI and the XAU's sharply rising trendlines since late July broke down on 11-2 but, most importantly, reliable lead indicator Newmont Mining's (NEM) uptrendline since late July held on 11-2. HUI put in an intermediate term cycle low at 221.18, NEM at 45.06, and the XAU at 98.68 on 11-2.

• Straight trendline intermediate term cycle buy signals (see latest charts) occurred on 11-4 and were confirmed by sufficient follow through on Friday 11-5. NEM trended down the entire session on 11-4 after a spike move to 48.54 just after the open. HUI/XAU trended down nearly the entire session on 11-4, so the intermediate term cycle buy signals weren't confirmed until 11-5. So, the fact that intermediate term cycle lows occurred on 11-2 for HUI/NEM/XAU was established on 11-5.

• Gold/silver commercial traders correctly engaged in substantial short covering during the week ending Tuesday 11-2 (and traded modestly long), while the notoriously contrarian gold/silver speculators did just the opposite and liquidated a substantial number of their long contracts (added a substantial number of short contracts) at the wrong time. Despite this, the gold/silver commercial traders have still dramatically increased their net short position the past 6-7 weeks (as of 11-2, NA on 11-12) which can't be ignored. The gold/silver commercial traders, based on the past 6-7 weeks trading activity (as of 11-2), remain positioned for a major correction.
  

• William's %R is in extremely overbought territory near 0 for HUI/NEM/XAU, which is a warning sign on a short term as well as an intermediate term cycle basis.

• A US Dollar (USD) intermediate term cycle low appears to be imminent (please see third chart). The spike move in gold/silver stocks since late July was in large part due to the sharp decline in the US Dollar recently (negative correlation of -77% with gold the past 180 days). A rebound in the USD and a plunge in gold stocks is likely in the near future, which fits the likely major correction scenario. However, the USD's very long term downcycle trendline should limit it's upside to about 87.50 versus a close on 11-12 at 83.75, down -0.13 from 11-5 (see third chart).
  

• HUI has a Relative Strength Index (RSI) divergence versus price for months with the prior two intermediate term cycle highs on August 20 and October 8. HUI's RSI trend has been much weaker than it's price trend since August 20, which portends gold/silver stock weakness.

• The major benefit, should a major correction occur soon, is that it would allow this long term upcycle to be a long healthy one, similar to the previous one that had five major corrections and lasted well over a year (7-26-02 until 12-2-03 for HUI/NEM and until 1-6-04 for the XAU).
  

• The many reasons why a major correction (within an ongoing long term upcycle however) probably looms:
  

• 1. NEM dramatically underperformed HUI for much of the past 6 weeks (see first chart) and is kissing the top of it's long term upcycle channel. NEM is a very reliable lead indicator.
  
• 2. The gold/silver commercial traders have dramatically increased their net short position the past 7-8 weeks (NA on 11-12), while the gold/silver speculators did just the opposite. Dismissing the gold/silver commercial traders tends to be a big mistake. It appears they're anticipating a major correction. 
• 3. The US Dollar commercial traders have dramatically increased their net long position the past 7-8 weeks (NA on 11-12) while the USD speculators did just the opposite, which points to a sustained rally in the US Dollar soon, and therefore weakness in precious metals, especially gold which has a much higher negative correlation with the USD (-77%) than silver does (-47%).
  
• 4. Spike moves, such as occurred in non market cap weighted HUI from late July until October 8, tend to be followed by substantial protracted corrections, potentially experiencing greater than a 15% decline and lasting a month or more. HUI/NEM/XAU may decline toward their straight long term upcycle trendlines in place since May 10, 2004. Please see the latest charts. Declines on the order of 15-20% may occur for HUI/NEM/XAU, since the sharply rising long term upcycle trendlines since late July (HUI/XAU) have broken down.
  
• 5. The dramatic rise in the XAU Put/Call Ratio to 0.79200 (November expiration as of 11-12) from 0.67146 on 11-5 reflects strong accumulation of XAU put options in anticipation of a substantial decline.
• 6. There were FIVE such major corrections in the previous long term upcycle from 7-26-02 until 1-6-04 for the XAU (see 5 year XAU chart dated 8-20-04).
  
• 7. The gold/silver analysts are (in general) extremely bullish right now which is a bad sign. Many are talking about breakouts and price explosions. While they are probably correct from a 6-12 month standpoint when a long term cycle high should occur, the next month or so is likely to be a humbling experience for them.
• 8. HUI Relative Strength Index (RSI) divergence versus price for months with prior two peaks. See the latest chart. Also, HUI has only risen 1.08% since the 10-8-04 intermediate term cycle high at 239.90.
  
• 9. USD intermediate term cycle low appears imminent. See third chart.

• The numerous reasons above lead me to conclude that the likelihood of a painful protracted correction of 15-20%, potentially lasting 1 to 2 months, is probably much greater than 50%. I'm 100% in cash now. As discussed previously, if NEM's uptrendline since late July breaks down, if the USD's sharp downtrendline since early October is broken, or if HUI/XAU's long term upcycle channels break down, intermediate term cycle traders should look to exit long positions.

• NEM Lead Indicator data since 10-13: Last week - Friday 11-12 NEM +2.18% vs +2.44% for the XAU, on 11-11 NEM +0.50% vs +0.50% for the XAU, on 11-10 NEM -1.37% vs -0.78% for the XAU, on 11-9 NEM +0.08% vs -0.22% for the XAU, on 11-8 NEM -0.14% vs -0.31% for the XAU, Two weeks ago - Friday 11-5 NEM +2.32% vs +2.41% for the XAU, on 11-4 NEM +2.00% vs +2.42% for the XAU, on 11-3 NEM +2.60% vs +2.40% for the XAU, on 11-2 NEM -2.16% vs -2.41% for the XAU, on 11-1 NEM -1.47% vs -1.42% for the XAU, Three weeks ago - Friday 10-29 NEM +2.11% vs +1.78% for the XAU, on 10-28 NEM -0.56% vs -1.54% for the XAU, on 10-27 NEM -2.07% vs -2.32% for the XAU, on 10-26 NEM +0.27% vs -0.31% for the XAU, on 10-25 NEM +3.34% vs +3.54% for the XAU, Four weeks ago - NEM -0.63% vs XAU +0.13% on 10-22, NEM +0.46% vs XAU +0.40% on 10-21, NEM +3.15% vs XAU +2.90% on 10-20, NEM +0.09% vs XAU +0.57% on 10-19, NEM -0.07% vs XAU -1.50% on 10-18, Five weeks ago - NEM +1.47% vs XAU +2.00% on 10-15, NEM +0.36% vs XAU +0.16% on 10-14, NEM -1.19% vs XAU -2.89% on 10-13.
  

• Buy and hold for most investors/traders (until the long term cycle high in probably about 6-12 months) makes a lot of sense unless you're a nimble trader (but consider the likelihood of a major correction in the near future, there are exceptions to most rules). Nimble traders have a good chance (using my system) of increasing returns by trading intermediate term cycles that typically last 1 to 3 months for an entire cycle up and down. Most traders/investors are much better off buying and holding long term upcycles. The previous long term upcycle lasted from 7-26-02 until 12-2-03 for HUI/NEM and until 1-6-04 for the XAU.

• XAU Implied Volatility, which usually factors in early in the session, fell -2.07% to 27.945 on Friday 11-12 from 28.535 on 11-11 versus a +2.44% rise in the XAU, which is a modest 0.37% rise in fear (-2.07% + +2.44% = +0.37%. The XAU wall of worry grew by 0.37%, therefore fear rose by 0.37%) that portends strength/an uptrend (probably early) on Monday 11-15. That strength/uptrend could follow a gap down as discussed in previous updates (I left the discussion in toward the bottom). I've noticed that XAU Implied Volatility usually factors in during the first few hours of a session, but cycle channels/trendlines are the most important consideration. It tends to indicate a trend/tone rather than necessarily up or down for that session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. If XAU Implied Volatility indicates strength and the XAU Put/Call Ratio portends weakness typically strength followed by weakness will occur but these indicators must be used in concert with cycle channels/trendlines (very long term, long term, intermediate term, and short term).

• The XAU Put/Call Ratio is at 0.79200 for the November expiration as of 11-12. The dramatic rise from 0.67146 on 11-5 reflects strong accumulation of XAU put options in anticipation of a substantial decline. The XAU Put/Call Ratio was at 0.85989 for the final October expiration value as of 10-15. If it rises 6% or less it portends strength following likely early weakness (indicated by XAU Implied Volatility). If it falls 6% or less it portends weakness. At unusually large greater than 6% moves the XAU Put/Call Ratio becomes non contrarian, so a greater than 6% rise portends weakness (unusually large rise in fear) and a greater than 6% decline portends strength (unusually large rise in complacency).
  

• A major indicator (NEM Lead Indicator) portending weakness (but all indicators and cycle channels/trendlines must be considered collectively, not in isolation. Think "system.") in the XAU on Monday 11-15 is the fact that NEM underperformed the XAU on Friday 11-12 by +2.18% vs +2.44% for the XAU and on 11-10 by -1.37% vs -0.78% for the XAU with a tie occurring on 11-11, NEM +0.50% vs +0.50% for the XAU. 

• There's an early warning system in place! The NEM lead indicator chart dated 11-12-04 below (first chart) reveals that NEM has begun to outperform recently as can be seen in the narrowing gap between NEM and HUI/XAU. When NEM underperforms HUI/the XAU for a few months then the long term upcycle that began on 5-10-04 will probably be in trouble, as was the case during the last few months of the prior long term upcycle that ended on December 2, 2003 (HUI/NEM)/January 6, 2004 (the XAU) and began on July 26, 2002. 
  

• The negative correlation between gold and the USD is high, but it isn't close to 100%. It's -77% on 11-12 (-73% on 11-5) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is only -47% on 11-12 (-42% on 11-5) for the past 180 days. Silver's negative correlation is much less than gold's because it's more of an industrial metal than gold is, hence it has a more positive correlation with US economic strength and a strong US Dollar.

• The following COT data is a week old since it wasn't available on 11-12 due to the Veterans Day Holiday shutdown.
  

• The reliable non contrarian (in terms of their trading activity) gold commercial traders are short gold. They are clearly positioned for gold weakness with only 112,152 long futures and options contracts versus 306,606 short futures and options contracts (data as of 11-2-04).
  

• The notoriously contrarian (in terms of their trading activity) gold speculators are correctly positioned for gold strength with 181,551 long futures and options contracts versus only 30,402 short futures and options contracts (data as of 11-2-04).

• The gold commercial traders added 1191 long futures and options contracts and covered 12,667 short futures and options contracts which portends strength this week (non contrarian indicator), but some of that strength occurred last week because the data is as of 11-2-04.

• The gold speculators (hedge funds and other speculators/traders) sold 10,730 long futures and options contracts and added an unusually large (> 10% increase in short contracts) 5356 short futures and options contracts which portends strength this week (contrarian indicator), but some of that strength occurred last week because the data is as of 11-2-04 and the unusually large degree of shorting points to some weakness. 

• The reliable non contrarian (in terms of their trading activity) silver commercial traders are short silver. They are clearly positioned for silver weakness with only 20,741 long futures and options contracts versus 101,581 short futures and options contracts as of 11-2-04.

• The notoriously contrarian (in terms of their trading activity) silver speculators are correctly positioned for silver strength with 61,133 long futures and options contracts versus only 2877 short futures and options contracts as of 11-2-04.

• The silver commercial traders added 1261 long futures and options contracts and covered 2094 short futures and options contracts which portends strength (non contrarian indicator) this week, but some of that strength occurred last week because the data is as of 11-2-04.

• The silver speculators (hedge funds and other speculators/traders) sold 5842 long futures and options contracts and covered 2912 short futures and options contracts which portends strength this week (contrarian indicator), but some of that strength occurred last week because the data is as of 11-2-04.

• The reliable non contrarian (in terms of their trading activity) USD commercial traders are clearly positioned for US Dollar strength with 17,494 long futures contracts versus only 928 short futures contracts as of 11-2-04. Last week they added 2156 long futures contracts and covered 452 short futures contracts which portends USD strength this week (non contrarian indicator). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be contrarian (I'm not using/noting unusually large changes here).
  

• The notoriously contrarian (in terms of their trading activity) USD speculators are correctly positioned for US Dollar weakness with only 6159 long futures contracts versus 19,384 short futures contracts as of 11-2-04. Last week they added 594 long futures contracts and added 2836 short futures contracts which portends USD strength this week (contrarian indicator). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be non contrarian (I'm not using/noting unusually large changes here).

• The remainder of the bullets didn't change from last week, so you may want to skip down to the charts. I left them in because they address the very important long term upcycle buy signal discussion and other very important "big picture" information as well as information about my system/indicators. Also, it's a good idea to leave them in because some people are reading this for the first time.
  

• I know some of you have difficulty grasping some of the technical work that's part of my system. Well, I have great news for you. By far the most important part of my system, the basis and crux of my system, are the cycles (very long term (about 35 years for an entire cycle up and down), long term (1 to 3 years), intermediate term (1 to 12 months), short term (days/weeks), very short term (hours/days), intraday) and their channels/trendlines (see the charts). If you can't deal with the detailed technical work you can simply use cycle channels/trendlines on the charts in order to time gold/silver stocks or any other market. You also have to keep in mind that cycles tend to become more parabolic/sharply rising or declining over time.
  

• The fact that HUI, NEM, and the XAU are in very long term upcycles since late 2000 (see NEM and the XAU's very long term upcycle charts, my charting service doesn't go back that far for HUI) and the fact that HUI, NEM, and the XAU are in long term upcycles since May 10, 2004 (see latest charts) are by far the most important factors. Therefore, one really just needs to use cycles and their channels/trendlines in the charts in order to time gold/silver stocks (or any other market). The indicators and COT data are more for finetuning entry/exit points (more for traders).
  

• Keep in mind that my system is relatively new and only reached a well developed stage (with a good understanding of cycles and the three indicators, the NEM Lead Indicator, XAU Implied Volatility, and the XAU Put/Call Ratio, as well as the Commitments of Traders (COT) data) in 2003. Therefore, my application and understanding of the system is still somewhat on a learning curve. My system/research/analysis is relatively new and will probably continue for years. The cycle channels/trendlines in the charts are the basis/crux of my system and help greatly to provide a comfort zone for most I think.

• The intermediate term cycle buy/sell signals my system uses are straightforward. Straight trendline intermediate term cycle buy/sell signals occur when trendlines connecting short term cycle highs or lows are broken and confirmed by sufficient follow through (1 to 2%). See the charts for examples. Parabolic trendline intermediate term cycle buy/sell signals only occur very near the top or the bottom of the long term cycle channels.
  

• Usually when the parabolic trendline intermediate term cycle sell signals occur (as they did on Monday 10-4 for HUI/the XAU, see HUI/XAU charts dated 10-1-04 for parabolic intermediate term upcycle trendlines that clearly broke down on 10-4), the intermediate term upcycle has at least begun to roll over (rate of ascent begins decreasing) and it's possible the intermediate term cycle highs are in, but often higher highs will occur as they did for both HUI and the XAU.
  

• Once the parabolic trendline intermediate term cycle sell signals occur, traders should look to take profits in the near future. The topping process (cycle rolling over), if the highs aren't already in as sometimes is the case (such as 8-20 for HUI/XAU), begins after the parabolic trendline sell signal.
  

• There tends to be choppy sideways action (the intermediate term cycle flattens out/rolls over) for a few days to a week near intermediate term cycle highs (see highs near the top of long term upcycle channels), but every cycle is different. Taking profits in 2-3 stages probably makes sense. The intermediate term cycle highs that occurred on 8-20 for HUI/XAU occurred just before the parabolic trendline intermediate term cycle sell signals, whereas NEM managed to make a slightly higher high at 44.84 on 9-1 than it's high at 44.74 on 8-20 following it's parabolic trendline intermediate term cycle sell signal.

• Those trading intermediate term cycles (probably the shortest timeframe the vast majority should trade, the majority should trade long term cycles that last 1 to 3 years for an entire cycle up and down) should never (unless you're trying to pick a top which is impossible to do consistently) sell prior to parabolic trendline intermediate term cycle sell signals (occurred 10-4 for HUI/XAU) and can begin to sell afterwards or simply wait for the straight trendline intermediate term cycle sell signal IF it doesn't result in a stop that's too loose (trendline may sometimes be too flat to wait for it to break down).
  

• Trading intermediate term cycles typically will result in being long about 2-4 weeks and being in cash and/or short for about 1 to 3 weeks.

• With my system, I only begin looking for an intermediate term cycle high after the rate of ascent slows (the intermediate term cycle starts to roll over), which occurs after parabolic intermediate term cycle trendline sell signals (occurred on 10-4 for HUI/XAU).

• To keep things simple, investors and traders basically buy near the bottom of the channel(s) and sell near the top depending on which timeframe you're investing/trading, using parabolic (more for traders) and straight trendline cycle buy/sell signals (see charts) with straight trendline cycle buy/sell signals confirming parabolic trendline cycle buy/sell signals. For example, intermediate term cycle highs occur near or at the top of the long term upcycle channels (NEM did in late May, mid July, and on September 1) and intermediate term cycle lows occur near or at the bottom of the long term upcycle channels. It helps immensely to understand the nature of cycles with cycle highs usually occurring after dramatic spike moves (cycle trendline turns nearly straight up) and cycle lows usually occurring after dramatic plunges (cycle trendline turns nearly straight down).

• I want to make sure everyone understands what I mean by an intermediate term (1-12 months for the entire cycle up and down) cycle. An intermediate term (months) cycle lasts anywhere from 1 to 12 months and usually lasts 1 to 3 months for the entire cycle up and down. An intermediate term downcycle refers to the down portion of an intermediate term cycle, typically only lasts a few short weeks, and many times lasts less than two weeks.

• A trendline for an entire cycle is comprised of various segments, which, when combined, form a parabolic shape. That's why I talk about "the straight trendline since the May 10 long term cycle low" or the "parabolic/sharply rising uptrendlines for HUI/XAU since late July" that broke down on Tuesday 11-2.

• I've added a new cycle to my system called a long intermediate term cycle that's comprised of two or more intermediate term cycles. On May 10, 2004 and in late July 2004 long intermediate term cycles began for gold/silver stocks and the metals for example.

• With the XAU Put/Call Ratio I calculate it prior to the open and compare it to the prior session's value, with a rise up to 6% portending strength and a decline up to 6% portending weakness. At greater than 6% moves the XAU Put/Call Ratio becomes non contrarian probably because something's up which causes so many traders to buy puts or calls. It's kind of a voting machine. When there's enough votes for weakness (many puts being bought) then weakness/a downtrend usually results and vice versa.
  

• For XAU Implied Volatility, as I do weekly in my updates, I compare the prior session's change with that of the XAU and come up with a delta that's used exactly as discussed above.  For example, if the XAU rises 2% and XAU Implied Volatility falls 1% that's a +1% change/delta which is a significant (0.50%-1.99%) rise in fear that portends strength. The XAU wall of worry held up well during the prior session which portends strength. If I had real time XAU Implied Volatility I could do that calculation just prior to doing a trade. The next best thing I use now intraday is VIX (S & P 500 Volatility Index) since NEM is in the S & P 500. I get real-time VIX from ASKResearch.com for $25/month. I have no affiliation with them except I'm a subscriber.
  

• These indicators portend trends/a session's tone rather than plus/minus for the session. Even if both indicators portend weakness for a particular session, there could be a large gap up at the open followed by a downtrend most of the session, potentially closing higher for the session, in which case the indicators still worked properly. They portend a tone/trend (weakness or strength/downtrend or uptrend) rather than wether that session will close with a gain or a loss. Gaps up or down are very common with gold/silver stocks. Also, more strength is likely in an intermediate term upcycle than an intermediate term downcycle if an indicator portends strength for example. Of course, one must know support/resistance levels using long term cycle, intermediate term cycle, and short term cycle channels/trendlines.

• When timing cycle lows, wait for a substantial plunge into the target range. Then there usually is a significant but relatively modest rally/very short term upcycle followed by a decline again, which, if a higher low occurs, probably means that the intermediate term cycle lows are in. One can also wait for an intermediate term cycle straight trendline buy signal, but sometimes gold/silver stocks will "run away from you" if you wait for that buy signal. Basically, if the plunge takes HUI, NEM, and the XAU close to the bottom of their long term upcycle channels, you can buy if you're confident in those channels. What helps a lot also is that NEM usually/almost always leads, so watching NEM is usually like having a window into the future. After the intermediate term cycle lows are in there should be (usually is) a few hours or even a few days of sideways action. Something to look for. Cycles tend to start out relatively flat (flat rising troughs/bottoms uptrendline) and become more parabolic/sharply rising over time, usually culminating in dramatic spike rallies at cycle highs.

• The deltas or changes in the COT data are the important thing to look at, because they reveal the trading activity of the commercial traders versus the speculators. The notoriously contrarian (in terms of their trading activity) gold/silver speculators have been correctly positioned for gold strength in recent months, but are poor traders as evidenced by their tendency to enter huge trades at the wrong time (go long in a huge way near the top or short near the bottom). This has occurred at least 3 times in recent months. The reliable non contrarian gold/silver commercial traders made correct huge trades in recent months at least 3 times. So, the gold/silver commercial traders are far superior traders than the gold/silver speculators are, which is what has allowed them to maintain their large net short position for a long time, despite gold/silver's Bull Market/very long term upcycle since 2001 (gold/silver stocks since late 2000).

• Something to keep in mind is that gold/silver stocks tend to follow the major averages largely because NEM is in the S & P 500 and is therefore traded by index funds and other funds that correlate highly with the S & P 500.
  

• Reliable lead indicator NEM (down 18.62% as of 8-13-04 from the 50.28 long term cycle high on 12-2-03) outperforming HUI (-26.59% as of 8-13-04 from the 258.60 long term cycle high on 12-2-03) and the XAU (-22.55% as of 8-13-04 from the 113.41 long term cycle high on 1-6-04) in recent months correctly portended strength.
  

• Reliable lead indicator NEM confirmed that a parabolic trendline long term cycle buy signal occurred in May when a straight trendline long term cycle buy signal occurred on Thursday 8-19 (see NEM charts). The XAU confirmed that a parabolic trendline long term cycle buy signal occurred in May when a straight trendline long term cycle buy signal occurred on Friday 8-20 (see charts). HUI has yet to confirm a long term cycle buy signal, but it's a foregone conclusion given that NEM and the XAU have done so.
  

• NEM's straight long term cycle buy signal that occurred on Thursday 8-19 was accompanied by very high volume of about 8 million shares and NEM trended up the entire session into the early part of Friday 8-20's session, so the straight long term cycle buy signal on 8-19 was confirmed by sufficient follow through on very high volume. NEM rose 4.16% on 8-19 which is a very big day for NEM which tends to have lower volatility than many gold/silver stocks because it has the largest market capitalization of any gold/silver stock to my knowledge.

• The relatively flat start to this long term upcycle since 5-10-04 implies that it will be a long one, possibly longer than the prior long term upcycle that lasted from 7-26-02 until December 2, 2003 for HUI/NEM and until January 6, 2004 for the XAU. Also, the fact that the very long term upcycles for HUI, NEM, and the XAU have all turned up and increased in strength is a major positive which implies that the gains seen in this long term upcycle are likely to exceed those in the prior long term upcycle during which HUI rose 178.6% from it's long term cycle low at 92.82 on 7-26-02 to it's long term cycle high at 258.60 on 12-2-03.
  

• NEM (Newmont Mining) again proved to be a reliable lead indicator by flashing a straight trendline long term cycle buy signal on 8-19 one day before the XAU did, and by outperforming the XAU and HUI since the long term cycle highs, it correctly portended strength.
  

• Much less extreme long term cycle lows occurred than was suggested by their very long term upcycle trendlines. The very long term upcycle trendlines have turned up (See NEM and the XAU's very long term upcycle trendlines, my chart service couldn't do HUI's) after less than four years, which is surprising and has very bullish implications for gold/silver stocks and of course the metals, and has very bearish implications for the US Dollar (USD) and the US economy. This is consistent with a post bubble very long term US economic downcycle that began in 2000.
  

• I'll have to find out when the prior gold/silver stock very long term upcycle first went parabolic/turned up, but the major averages' very long term upcycle from 1982 until 2000 didn't go parabolic/turn up until 1995 which was more than 12 years after the start of that cycle. 1995 was the first time that the major averages turned up in their prior very long term upcycle.

• Silver may lag gold it appears, at least from a very long term cycle standpoint, but I need to do more research. Silver experienced a very long term cycle low/Bear Market Bottom in late 2001 about 6 months after gold did for example. I consider gold's very long term cycle low/Bear Market low to be in early 2001 (Aprilish) rather than in 1999 because the 1999 low was followed by a huge spike and quickly returned to a downtrend/Bear Market behavior, which means that the very long term cycle buy signal was never confirmed by sufficient follow through. Gold didn't begin acting like it was in a Bull market until after 2001's very long term cycle low, hence the Bull Market in gold didn't begin until early 2001 while silver's Bull Market began in late 2001. Gold/silver stocks led the metals, beginning a Bull Market in October/November 2000 (see the four year charts).

Joe F. Rocks!

====================== End of Update ==============================

The following analysis/commentary didn't change from 4-25's update -

There's some debate about wether the gold stock Bull has ended and deflation will occur or if inflation will increase substantially. Take a look at commodities, housing, healthcare costs, education costs, etc. and what do you see? It's not deflation. The US Dollar (USD) is merely having a countertrend rally and gold a countertrend decline that has a ways to go. The USD is in a very long term downcycle that began in mid 2001 which is INFLATIONARY. Case closed. Basically the US has a crappy economy and high inflation a la the 1970s which is great for precious metals just as it was in the 1970s.

The post bubble economic cycle has deflationary effects (such as in the stock market and the economy) that are being fought with massive stimulus and an extremely easy monetary policy at least as far as rock bottom short term rates are concerned.

The cycle based system I use has stood a great test and the long term downcycle remains in effect despite trendline "buy signals" suggesting otherwise (if one didn't use/understand cycles). The long term upcycle trendlines for HUI and the XAU that began in October 2002 for HUI and in July 2002 for the XAU broke down in January of this year and those indices are now heading (I strongly believe, similar to what occurred after the prior two long term upcycles broke down as shown in the chart below) for their very long term upcycle/Bull Market trendlines in the next few months.  The XAU should bottom in the 70-75 area as the chart below reveals.

As one can see in the chart below from 2-6-04 the XAU's long term downcycle remained in effect two long term cycles ago in 2001 despite the long term downcycle becoming less steep as has recently occurred in this long term downcycle. In the previous long term downcycle in 2002 the downcycle's trend was very steep/parabolic and a long term cycle low occurred less than two months after the long term cycle high.

The XAU Put/Call Ratio collapsed (fell by > 6%) on both Thursday 3-25 and Friday 3-26, correctly portending strength each day because it was an unusually large rise in complacency that portends strength. However, the collapse of the XAU Put/Call Ratio to 0.58064 on 4-8 for the April expiration from levels well above 1.00 a few months ago correctly portended weakness because the gold stock market became very complacent.

I originally thought that HUI (AMEX Gold Bugs Index) was the most important index because it isn't affected nearly as much as the XAU (Philadelphia Gold/Silver Index) is by mining firms that hedge (they've underperformed in this Bull market). Then I began to emphasize the XAU more because it had a higher correlation to reliable lead indicator Newmont Mining (NEM). About 25-30% of the XAU is determined by NEM because it's a market cap weighted index and NEM, with a market cap of nearly $20 Billion, is much larger than even the second largest firm in the XAU, Barrick (ABX), at nearly a $12 Billion market cap. Durban Roodeport Deep (DROOY) has a market cap below $1 Billion as of 3-19.

The problem with relying heavily on NEM and the XAU as I was doing is that a stock or a market cap weighted index with relatively few components like the XAU is much more likely than a non market cap weighted index like HUI of exhibiting anomalous/unusual behavior as NEM and the XAU have recently. Their long term downcycle trendlines were broken to the upside a few times, but a lack of sustained substantial followthrough meant those buy signals weren't confirmed.

Both NEM and the XAU's long term downcycle trendlines have become less parabolic/sharply declining in recent months with both long term and intermediate buy signals appearing to have occurred yet meaningful followthrough failed to occur and those major buy signals were NOT confirmed, which vindicated my assumption that a long term buy signal (break above the long term downcycle trendline and substantial followthrough) won't occur until after the XAU falls to it's Bull Market/very long term upcycle trendline in the 70-75 area in the next few months.

NEM's anomalous/unusual behavior caused the XAU to exhibit similar behavior because of the huge influence NEM has on the market cap weighted XAU, but such behavior did NOT occur with HUI.

HUI's long term downcycle trendline has not been pushed up like the XAU and NEM's have been (see their charts below) because it's not a market cap weighted index. Hence, it's very important to watch HUI as closely as the XAU and NEM. That's a major lesson I learned.

Understanding cycles is by far the most important part of my system. The fact that the long term cycle has turned down is extremely important as is the fact that the intermediate term cycle turned down also. The long term cycle's downtrend will become more steep and the intermediate term cycle's downtrend will become more steep.

If the long term, intermediate term, and short term cycles are all heading down one should expect much less strength when the XAU Put/Call Ratio portends strength than if those cycles were all heading up. The XAU Put/Call Ratio jumped 5.44% on Friday 2-27 (1.17251 to 1.23624 for the March expiration), yet, from the intraday/very short term (hours/days) cycle low in negative territory to the short term cycle high the XAU rallied less than 1.50%. If the long term and intermediate term cycles had been heading up instead of down the XAU probably would have risen at least twice as much as it did on Friday 2-27.

One also must consider where gold stocks are in their cycles. The long term downcycle's weakness has increased significantly since beginning on 1-6-04 for the XAU and on 12-2-03 for HUI BUT it will get weaker.

The primary consideration in assessing gold stock timeliness (or any market's timeliness), even on a one session basis, is what the cycles are doing. Long term, intermediate term, and short term cycles MUST be considered and very short term (hours/days) cycles can occasionally be important. It can be difficult to differentiate between short term (days/weeks) and very short term (hours/days) cycles much of the time. You might not know until after the fact that a cycle was short term or very short term.

HUI, NEM, and the XAU as of 5-14-04

HUI, NEM, and the XAU as of 4-23-04

NEM (most important) and the XAU's Very Long Term Cycle as of 1-16-04

The date in the annotation below should be 10-10-02 (10-8-02 for NDX) not 11-10-02:

Silver stocks like CDE, HL, and PAAS may present good long opportunities since silver is more volatile than gold BUT since NEM, the XAU, and HUI are in long term downcycles risk has greatly increased. SSRI and SIL tend to be too thinly traded which is why I don't recommend trading them. PAAS can be too thinly traded also but recently PAAS has tended to have daily volume above one million shares. CDE is the most liquid and probably the best silver stock to trade because it usually has at least 2-3 million shares/day. One tends to get better and much faster executions for market orders (also limit orders may not get filled at the price you want and you may have to cancel and re enter an order with illiquid stocks) with a liquid stock than an illiquid stock.

Something very important to keep in mind is that gold stocks/gold have an inverse relationship/negative correlation with the US Dollar much more so than with the US major averages (though in the very long term the negative correlation may be about the same). Both HUI, the XAU, and the US major averages have enjoyed a huge run since mid March 2003. Obviously they haven't had a negative correlation since mid March 2003. However, the US Dollar (December 2003 contract) has fallen from nearly 100 in early September 2003 to nearly 89 on 12-5-03 for nearly an 11% decline for example.

Also, as I've discussed previously, NEM (Newmont Mining) is in the S & P 500 (SPX) so index mutual funds buy or sell NEM when SPX rises or falls, which accounts for the high correlation much of the time between gold stocks and the major averages (especially SPX of course).

The theory is that when the XAU Put/Call Ratio (for the nearest expiration) appears to fail it tells you something that's extremely important. It probably indicates that an intermediate term cycle high or low is imminent, that it will probably occur during that session or in the very near future. The intermediate term cycle is near or at it's maximum strength or weakness and is overriding the normally very reliable XAU Put/Call Ratio (for the nearest expiration).

Also, as one can see in the next chart the XAU (as of 11-28-03) was very near the top of it's long term cycle rising peaks trendline, so the long term cycle was near or at it's maximum strength which tended to override the normally very reliable XAU Put/Call Ratio (for the nearest expiration).

The point is when the XAU is overbought (RSI > 70) near an intermediate term cycle high or oversold (RSI < 30 but the ascending triangle formation limited the downside and RSI hasn't been falling below 30 at recent intermediate term cycle lows) near an intermediate term cycle low and the XAU Put/Call Ratio (for the nearest expiration) appears to fail it probably indicates that an intermediate term cycle high or low is imminent, which is obviously a very important piece of information.

The XAU Put/Call Ratio (for the nearest expiration) may be an even better indicator than I thought (which makes an amazingly accurate indicator even more so). If interpreted properly it may bat 1000 (100%) or very close to it. This is just a theory right now, but I believe it's a correct one until proven otherwise (because the XAU Put/Call Ratio (for the nearest expiration) is being overriden by the intermediate term cycle (and possibly also long term cycle in this case) being near or at it's maximum strength (or maximum weakness when it failed on 11-6 the day before 11-7's intermediate term cycle low)).

The XAU Put/Call Ratio (for the nearest expiration) must be used in concert with cycles (from very short term (hours/days) to very long term (3-10+ years)) to be properly interpreted, so when cycles are bottoming or peaking they can make the XAU Put/Call Ratio (for the nearest expiration) "fail" but I think they are overriding it and that "failure" really is a very important indication that a cycle is bottoming or peaking. In fact, HUI and the XAU experienced intermediate term (months) cycle highs on Tuesday 12-2 at 258.60 and 112.75 respectively.

Assuming that gold began a very long term (3 to 10+ years) Bull Market in mid 2001 (about 7-8 months after the gold stocks), it was logical to assume that the prior eight year cycle high at about $418/ounce (in late 1995) would be exceeded as has already occurred.

The chart below (as of 11-28-03) shows the very long term (3 to 10+ years) cycle for the XAU which began in late October 2000. The very long term uptrendline implies that a long term cycle low will occur in the 70-75 range during the next few months. The annotation regarding the long term cycle high is old.

Keep in mind that the stocks usually lead the metal and that NEM (Newmont Mining) usually leads the stocks, so NEM is (appears to be) an extremely important indicator. Note that I do NO TECHNICAL ANALYSIS ON THE METAL HERE. I may decide it's necessary in the future of course (never stop learning and conditions may change).

More evidence that NEM is an excellent lead indicator for gold stocks:

Since Newmont Mining (NEM) influences the XAU to a much greater extent than it influences HUI because the XAU is market cap weighted, I've come to appreciate the XAU more recently since NEM seems to be a very good leading indicator (see the charts below and the one above) for gold stocks (and usually silver stocks), but more research is required. NEM's chart can be watched and used as a leading indicator (it appears). The second chart dated October 9 shows that NEM outperforming the XAU prior to the October 3 (a few cycles ago) intermediate term cycle low correctly portended strength.

I need to update how I'm using the XAU Put/Call Ratio (for the nearest expiration). The comparison method with the percentage change in the XAU discussed below is ONLY used when the XAU Put/Call Ratio (for the nearest expiration) doesn't change the next day. In recent months it's been changing nearly every day.

I simply calculate (Simply divide the total put open interest by the total call open interest to arrive at the XAU Put/Call Ratio.) the XAU Put/Call Ratio (for the nearest expiration) just before the session begins and calculate the percentage change from the prior day (a rise to 1.05 from 1.00 for example is a very sharp (3-6%) 5% rise in fear that portends dramatic strength) to determine wether fear or complacency has crept in to the XAU.

I don't compare it to the change in the XAU until the end of the day in case it doesn't change the next day. If the XAU Put/Call Ratio (for the nearest expiration) rises 2% and the XAU falls by 1% that's a delta of +1% which is a significant rise in fear. A delta of -1% is a significant rise in complacency. This comparison method is only used when the XAU Put/Call Ratio (for the nearest expiration) remains unchanged the next session.

Also, there may be/probably is more merit in comparing the XAU Put/Call Ratio (for the nearest expiration) to the XAU's % change at the open when it doesn't change as opposed to comparing it to the prior day's change. Since in recent months it's changed nearly every day I don't have nearly enough data to know which method works better, but it makes more sense I think to compare an unchanged XAU Put/Call Ratio (for the nearest expiration) to the open (or the early tone in case there is very brief weakness followed by strength or vice versa) rather than the prior session's change.

As discussed below an unusually large rise (> 6%) portends weakness (a relatively rare non contrarian case for this typically contrarian indicator) and an unusually large decline (> 6%) portends strength (a relatively rare non contrarian case for this typically contrarian indicator). Unusually large moves in contrarian indicators usually makes them non contrarian because usually "something's up" which causes the unusually large move in the indicator.

One must keep in mind that the XAU Put/Call Ratio (for the nearest expiration) MUST BE USED in concert with very short term and intermediate term cycles/trendlines. If one doesn't have the proper trendlines (with price targets based on them and sell signals acted on when uptrendlines break down or buy signals acted on when a trend change to an uptrend occurs) then the XAU Put/Call Ratio (for the nearest expiration) may appear to have failed when in fact it worked.

One should check the XAU Put/Call Ratio (for the nearest expiration) very early in the session to see if it's changed significantly and determine wether fear or complacency has crept into the XAU. Simply divide the total put open interest by the total call open interest to arrive at the XAU Put/Call Ratio. A % rise up to and including 6% (rise in fear) portends strength because the XAU Put/Call Ratio (for the nearest expiration) is usually a contrarian indicator. A % rise > 6% is an unusually large rise in fear that portends weakness (non contrarian case for this usually contrarian indicator). A % decline up to and including 6% is a rise in complacency that portends weakness. A % decline > 6% is an unusually large rise in complacency that portends strength (non contrarian case for this usually contrarian indicator). The larger the % changes are the more the XAU tends to move that day.

The XAU Put/Call Ratio (for the nearest expiration) which "didn't work" (but really did in a sense) or didn't work well in a number of sessions recently (when it portended strength during the intermediate term downcycle from 1-6-04 to 1-15-04) provides insight into where gold stocks are in their cycles (short, intermediate, and long term). By not working or not working well (it normally works well about 90% of the time when properly used in concert with cycles/trendlines) during 3 or 4 recent sessions it was a major warning that the intermediate term cycle and possibly also the long term cycle had turned down. I'm going to try to get better at observing this in the future.

I've come up with a potential new "region" (interpretation) for the XAU Put/Call Ratio (for the nearest expiration). Conceptually I think most people will agree/grasp that there's a point at which fear (bearishness) becomes so extreme that there's no place for a market to go but up and conversely there's a point at which complacency (bullishness) becomes so extreme that there's no place for a market to go but down. Also, there's almost certainly a point at which a sentiment change/delta (rise in fear or complacency) becomes so extreme that the same phenomenon occurs.

The XAU Put/Call Ratio is usually a contrarian indicator BUT an unusual rise in fear with a contrarian indicator usually portends weakness (non contrarian case for contrarian indicators) and an unusual rise in complacency portends strength though I don't do anything mechanically in my work/system. One should always use all relevant indicators, tools, info, technical condition, channels/trends, wether the intermediate term cycle is heading up or down, fundamental factors such as expected weak economic data, etc. At times "keen analytical judgement" is involved.

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The dashed lines above were for the folks at Trading-Ideas.Com and AfterHourTrades.Com so they knew which commentary to use when this commentary was updated daily.

When using this site I suggest that you might need to open the home page in a number of different windows. You might want to access a number of pages at the same time such as this page, Astrikos real time VXN, Astrikos real time COMPX, etc. I added more real time resources to help time the upcoming cycle low and to improve the short term trading resources.

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NASDAQ "Institutional" (really block trading data that includes individuals as well) Money Flow (Primary growth stock indicator) for the week ending 11-12 = Negative. Downtick block trades outpaced uptick block trades (725 more downtick blocks) by 3.04% (2.77%, 4.76%, 2.16%, 0.80%, 1.13%, 4.28% more downticks the prior six weeks, 1.63% more upticks the prior week, 1.12%, 5.77%, 1.63%, 1.19%, 6.08% more downticks the prior five weeks, 0.71%, 3.22% more upticks the prior two weeks, 2.53% more downticks the prior week, 0.94%, 1.79%, 1.16%, 1.89% more upticks the prior four weeks, 1.54%, 3.34%, 0.74%, 2.49%, 7.70%, 1.04%, 1.67%, 1.25% more downticks the prior eight weeks, 3.51% more upticks the prior week, 3.68%, 0.46%, 2.99%, 4.75%, 3.36%, 1.05%, 0.41%, 3.86%, 3.64%, 0.31%, 3.74%, 3.47%, 2.26%, 2.61%, 5.20%, 5.86%, 2.86%, 7.41%, 2.27%, 2.71%, 1.50%, 4.87%, 3.32%, 2.82%, 5.31%, 3.04%, 0.84% more downticks the prior 27 consecutive weeks, 1.82%, 1.47% more upticks during the prior two weeks, 0.85% more downticks during the prior week, 0.34%, 0.33%, 0.28% more downticks during the three weeks ending 9-12-03 (two weeks were skipped after this), 0.36%, 0.93%, 2.48%, 1.05%, 1.28%, 1.76% more upticks the prior six weeks, 1.99%, 2.61% more downticks the prior two weeks, 2.04% more uptick blocks the prior week, 0.66% more downtick blocks the prior week, 1.13% more uptick blocks the prior week, 1.74%, 4.84% more downtick blocks the prior two weeks, 2.20% more uptick blocks the prior week, 1.53% more downticks the prior week, 0.59% more upticks the prior week, 1.65%, 0.74%, 1.72% more downticks the prior three weeks, 5.67%, 2.54%, 0.80% more upticks the prior three weeks, 1.36% more downticks the prior week, 1.27%, 2.98%, 2.86%, 1.58%, 2.42%, 3.97%, 2.87%, 4.46%, 3.58% more upticks the prior nine weeks, 0.70% more downticks the prior week, 0.35% more upticks the prior week, 0.78%, 0.76% more downticks the prior two weeks, 2.96%, 1.86%, 0.07% more upticks the prior three weeks, 0.98% more downticks the prior week, 0.61%, 0.29%, 1.80% more upticks the prior three weeks, 0.84% more downticks the prior week, 1.02% more upticks the prior week, 0.91%, 0.94%, 1.21% more downticks the prior three weeks, 1.34%, 1.23%, 0.53%, 0.08% more upticks the prior four weeks, 1.14%, 1.57% more downticks the previous two weeks, 0.24% more upticks the prior week, 1.71%, 2.90%, 0.70% more downticks the previous three weeks, 0.74% more upticks the previous week, 2.81%, 2.32% more downticks the previous two weeks, 0.82%, 1.23%, 1.08%, 0.40% more upticks the previous four weeks, 0.57%, 3.28%, 0.45%, 2.16%, 0.76%, 1.13%, 2.39%, 0.19% more downticks the previous eight weeks, 1.07% more upticks the week before that, 2.34%, 3.49%, 3.52%, 2.34%, 1.15% , 0.69%, 0.89%, 1.49%, 0.87%,  2.48% more downticks the previous ten weeks. 1.20%, 1.50% and 0.60% more upticks the three weeks before that.).

The NASDAQ Institutional Money Flow trend has been (past 51 months) 2.0% more downtick blocks than uptick blocks each week on average, but a major trend change occurred in March of 2003 when it turned positive. However, another major trend change occurred the past 56 weeks with substantially negative money flow.

NYSE block trading data reveals very strong net buying for the week ending 11-12 though I don't tally it. Inflows have been very strong for more than two years. 

To keep apprised of updates to Joe F. Rocks! the Mind-it site appears useful though I haven't used it personally.

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