Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 12-11-05

Growth Stock (NASDAQ) Timeliness - Monday - Untimely (Weakness/a downtrend, that could follow a gap up at the open and early strength, during "much" of Monday's session is a "hit!.")
                                                           - Short Term Cycle (2-3 Days) - Untimely (NDX/QQQ are in short term downcycles as of 12-9-05.)
                                                           - Minor Intermediate Term Cycle (3-6 Weeks) - Untimely (NDX minor intermediate term upcycle may have peaked on 12-6-05.)

Brief Cycles Summary (Analysis/Commentary follows)

NASDAQ 100 Very Long Term Downcycle/Secular Bear Market = Down since March 24, 2000 Bull Market peak/very long term cycle high at 4816.35.

NASDAQ 100 Long Term Cycle = Up since long term cycle low at 1301.93 on 8-13-04.

S & P 500 Very Long Term Downcycle/Secular Bear Market = Down since March 24, 2000 Bull Market peak/very long term cycle high at 1552.87.

S & P 500 Long Term Cycle = Up since 8-13-04 long term cycle low at 1060.72. SPX is working it's way up to the very long term downcycle trendline.

XAU (Philadelphia Gold/Silver Index) Very Long Term Upcycle/Secular Bull Market = Began October 25, 2000 at 41.61 Bear Market/very long term cycle low.

XAU (Philadelphia Gold/Silver Index) Long Term Cycle (heading up) = Began May 10, 2004 at 76.79 long term cycle low. Long term cycle high occurred at 113.41 on 1-6-04.

HUI (AMEX Gold Bugs Index) Very Long Term Upcycle/Secular Bull Market = Began on November 15, 2000 at 35.31 Bear Market/very long term cycle low. 

HUI (AMEX Gold Bugs Index) Long Term Cycle (heading up) = Began May 10, 2004 at 163.81 long term cycle low. Long term cycle high occurred at 258.60 on 12-2-03.

Please see Cycles Summary for the details of the cycles that are the basis for my market timing system.

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The long term downcycle trendlines for NDX (NASDAQ 100) and SPX (S & P 500) were broken during the week ending 11-5-04, so (unexciting because of the very long term downcycle since March 2000) long term cycle buy signals occurred. Long term cycle lows occurred at 1301.93 on 8-13-04 for NDX and at 1060.72 for SPX. NDX and SPX both remain in very long term downcycles since March 2000 (see SPX chart dated 11-16-04).

"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 16 years later.

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 and a long term cycle low occurred at 1301.93 on 8-13-04. 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 112 weeks ago to negative/outflows correctly portended a trend change. Given last week's negative NASDAQ Institutional Money Flow, some weakness is indicated this week, but cycle channels/trendlines are the primary market timing consideration. A minor intermediate term downcycle may be in place (see chart below), but a 2% follow through sell signal hasn't occurred yet. 

The very long term downcycle (8-20 years in duration) which began in March 2000 probably has about 13 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).

The intermediate term upcycle from early May 2005 until early August 2005 broke down, but a major intermediate term upcycle is probably still be in effect because the intermediate term upcycle from early May 2005 until early August 2005 was probably a long minor intermediate term upcycle. The very long term downcycle (8-20+ years in duration) that began in March 2000 forces one to be conservative because risk is so much higher in a primary Bear Market. Since the early October intermediate term cycle lows held, I'm switching back to saying that a major intermediate term upcycle is in effect since early May 2005. In the first chart one can see that a major intermediate term cycle buy signal occurred in late May 2005/early June 2005 for NDX and probably remains in effect, but one must be conservative given the primary Bear Market since March 2000.

A Risky NDX long term cycle buy signal occurred because of the very long term downcycle since March 2000 and outflows nearly every week the past 112 weeks (see chart below). A major intermediate term cycle buy signal is in effect for NDX and SPX. A minor intermediate term cycle high may have occurred for NDX and SPX on 12-6-05, but 2% follow through sell signals haven't occurred yet.

NASDAQ Institutional Money Flow (block trading data, 10,000+ share blocks) "portends" (this isn't a good one week look ahead indicator except when there's a well established multiweek trend and the minor intermediate term cycle agrees with it) some weakness this week ending 12-16 (a minor intermediate term downcycle may be in place as of 12-9-05, which is the most important consideration) with 0.84% (168) more downtick blocks during the week ending 12-9. 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 112 weeks ago however and has generally been substantially negative, which resulted in a sharp decline until 8-13-04's long term cycle low.

Breadth, a primary fundamental indicator, was positive on Friday 12-9 with NASDAQ A/D at 3:2 in favor of advancing issues and NASDAQ Up/Down Volume was in favor of up volume by more than 12:5.

The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) shrank on Friday 12-9 with VXN revealing that a significant (0.50-1.99%) rise in complacency occurred for NDX (NASDAQ 100) and QQV revealed that a significant rise in complacency occurred for QQQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed Untimely on Monday due to the short term downcycle and the fact that NDX experienced a significant rise in complacency on 12-9. The short term downcycle in place at Friday 12-9's close usually would lead to weakness/a downtrend, and, a minor intermediate term downcycle may be in place (see the top chart in the group above), but a 2% follow through sell signal has not occurred yet. Better than expected economic data may result in strength.

Williams %R for NDX is at -53.04 on 12-9-05 (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)). NDX is on a major intermediate term cycle buy signal (5% follow through after breaking it's intermediate term downcycle trendline). NDX has been in a minor intermediate term upcycle, because a 2% follow through buy signal occurred (see the top chart above), but a minor intermediate term cycle high may have occurred on Tuesday 12-6. MACD is on a sell signal (below it's moving average). RSI and Stochastics are on sell signals. 

A significant rise in complacency occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) falling -0.30 (-1.94%) to 15.14 while NDX (NASDAQ 100) rose +7.03 (+0.42%) to 1692.62 which reveals that a significant (0.50-1.99%) rise in complacency occurred for NDX because VXN fell significantly while NDX rose modestly (NDX wall of worry shrank) which portends weakness in NDX on Monday, and, a short term downcycle is in place at session's end on Friday 12-9. 

A significant (0.50-1.99%) (+0.37% rise in QQQQ + -1.04% decline in QQV = -0.67% which is a +0.67% rise in complacency) +0.67% rise in complacency occurred for QQQQ (NASDAQ 100 Tracking Stock, +0.154 (+0.37%) to 41.715) on Friday since QQQQ rose modestly while QQV fell significantly (QQQ Volatility Index, -0.15 (-1.04%) to 14.31) (QQQQ wall of worry shrank) which portends weakness in QQQQ on Monday, and, a short term downcycle is in place at session's end on Friday 12-9. 

On Friday VIX (which is now calculated using the implied volatility of SPX (S & P 500) options instead of OEX (S & P 100) options) fell -0.52 (-4.26%) to 11.69 versus a rise in SPX of +3.53 (+0.28%) to 1259.37 which was a very sharp (3-6%) rise in complacency (wall of worry shrank) for the S & P 500/value stocks (SPX is about 75% value stocks) since VIX fell very sharply while SPX rose modestly (S & P 500) which portends weakness in SPX on Monday, and, a short term downcycle is in place at session's end on Friday 12-9. 

The S & P 500 (SPX) is deemed Untimely on Monday due to the fact that a very sharp rise in complacency occurred on 12-9 and a short term and possibly also a minor intermediate term downcycle are in effect. A short term downcycle is in place at Friday 12-9's close which usually would lead to weakness/a downtrend on Monday if it remains in place. Better than expected economic data may result in some strength. MACD is on a sell signal (below it's moving average). Stochastics and RSI are on sell signals. Williams %R for SPX is at -57.53 on 12-9-05 (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)). SPX is on a major intermediate term cycle buy signal (5% follow through after breaking it's intermediate term downcycle trendline). SPX has been in a minor intermediate term upcycle (2% follow through buy signal  occurred), but a minor intermediate term cycle high may have occurred on 12-6-05. A 2% follow through sell signal is required to confirm that's the case.

The CBOE Total Put/Call Ratio at an elevated (at or above 0.75 but below 0.90) level of 0.82 at Friday's close points to weakness/volatility on Monday (the CBOE Index Put/Call Ratio at an extremely high 1.37 points to weakness/volatility) because it's a reliable non-contrarian indicator of the next session's early action except at very high (at or above 1.05) or very 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). Please keep in mind that cycle channels/trendlines are the most important consideration when timing any market.

Looking at NASDAQ 100 (NDX) Chicago Mercantile Exchange Commitments of Traders - Futures Only (Reportable Positions as of December 6, 2005), the Speculators (hedge funds and other speculators/traders) added 1113 long futures contracts and covered 5373 short futures contracts which portends weakness this week (contrarian indicator), whereas, the Commercial Traders sold 340 long futures contracts and added 3433 short futures contracts which portends weakness this week (non contrarian indicator). NDX may be in a minor intermediate term downcycle as of 12-9-05 (2% follow through sell signal hasn't occurred yet). Cycle trendlines/channels are the primary market timing consideration. 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 very low levels below 40% bullish and very high levels above 60% bullish.) @ 49.5% bullish last week from 52.5% the prior week is a neutral factor for the prospects of stocks during the week ending 12-16-05 because it's at a mid range level of bullishness (between 40-60%). 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 decline last week is a negative factor for the prospects of stocks during the week ending 12-16-05 because it's a sharp rise in fear 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 (a few weeks/months).

Gold & Silver Stocks - The Elliot Wave 5 Short Term Upcycle Has Peaked
 

•  HUI, NEM, and the XAU hit parabolic as well as straight trendline short term and monthly cycle sell signals on 12-7 and 12-9 (see 5 day and 3 month HUI charts), indicating that Elliot Wave 5 short term cycle highs and potentially monthly cycle highs occurred on 12-9-05. If the monthly upcycle makes a higher high it will do so as it rolls over. The tradable part of the monthly upcycle ended last week. The NEM Lead Indicator was a bearish -0.83% versus the XAU during the last three sessions of the week and the gold COT (Commitments of Traders) data was basically bearish, with the Commercial Traders trading net short and the Speculators trading net long.            
  

• "Trade the Cycles" Near Term Synopsis - HUI, NEM, and the XAU put in monthly upcycle (began 10-20-05 for HUI/XAU, 11-4-05 for NEM) third/Elliot Wave 5 short term cycle highs on Friday 12-9 (see 5 day HUI chart). NEM underperformed the XAU by a bearish margin of -0.23% on Friday 12-9, underperformed by -0.41% on 12-8, and underperformed by -0.19% on 12-7, so NEM appears to be leading to the downside as expected. Monthly cycle highs may have occurred on Friday 12-9, or, at least the tradable part of the monthly upcycle ended last week, because monthly cycle sell signals (see 5 day and 3 month HUI charts) occurred. I didn't show the monthly cycle sell signals in the 1 year charts because it would be difficult to see them. In the third/Elliot Wave 5 short term upcycle the short term and monthly upcycle parabolic and straight trendlines are identical. The downside gaps created at 12-8's open at 260.89 for HUI and at 49.59 for NEM were filled on Friday 12-9. The XAU's downside gap at 121.98 created at 12-8's open should get filled in the near future as should 12-7's downside gaps at 255.82 for HUI, at 48.75 for NEM, and at 119.69 for the XAU. A likely scenario early this week is that the downside gaps will get filled, then a sharp rebound will occur in which HUI, NEM, and the XAU put in cycle highs not far below the Elliot Wave 5 short term cycle highs that occurred on 12-9-05. The monthly cycle may put in a higher cycle high as it rolls over, similar to what occurred in late September after a monthly cycle sell signal occurred (see 3 month HUI chart). The monthly downcycle will probably do a down, up, down Elliot Wave A, B, C correction as occurred in the previous monthly downcycle that began 9-30-05 (see 3 month HUI chart). The NEM Lead Indicator will be useful in assessing whether a higher monthly cycle high may occur in the next week or two in rollover mode, as occurred on September 30. Given how strong the monthly upcycle was (HUI rose about 27%), that makes a rollover mode more likely. A reliable sign for short term and monthly cycle traders to look to sell was to wait for NEM to underperform the XAU by a wide margin (probably leading to the downside) of greater than -0.50% in a session, which occurred intraday on Thursday 12-8 when it hit -0.80% versus the XAU. I sold most of my trading positions that day and sold the remainder on Friday 12-9, selling between the monthly upcycle parabolic and straight trendlines (identical to the Elliot Wave 5 short term upcycle trendlines), which is the optimum (from a risk/reward standpoint) sell window (see 5 day and 3 month HUI charts). Gold hit a 2% follow through minor intermediate term cycle buy signal recently (see 1 year chart). Gold's Elliot Wave A, B, C correction/intermediate term downcycle (similar to what recently occurred for gold stocks and lagging gold stocks as gold tends to do) ended near $456 in early November. The 2% follow through buy signal indicates that a minor intermediate term cycle low occurred near $456 in early November.
  

• "Trade the Cycles" Big Picture Synopsis - The most important market timing consideration, therefore the most important thing to remember, is that HUI, NEM, and the XAU are in the sharply rising phase of the long term upcycle (began on May 10, 2004) since May 16, 2005's major intermediate term cycle lows (see latest charts), and, this major upcycle should last until about May 2006 based on the fact that the long term cycles have been getting progressively longer (see first chart below and the HUI chart dated 5-12-05). HUI, NEM, and the XAU have been in a true Bull Market/very long term upcycle since October (NEM/XAU)/November (HUI) 2000 (see first chart below and the XAU chart dated 7-12-05). They've been in a long term upcycle since May 10, 2004 (see first chart below and the HUI chart dated August 5). They've been in a major intermediate term upcycle since May 16, 2005 (see latest charts). Gold began a very long term upcycle/true Bull Market in April 2001 and silver did so in late 2001. Elliot Wave Theory (see NEM chart dated 8-12-05 and the XAU chart dated 5-16-05) complements cycle channels/trendlines nicely (as do gaps), but is a secondary market timing tool, because cycle channels/trendlines are the primary market timing consideration.

• Parabolic and straight trendline sell signals occurred last week for both the monthly upcycle since 10-20-05 and the Elliot Wave 5 short term upcycle since 11-30-05 (see 5 day and 3 month HUI charts). You should sell between the parabolic and straight trendline sell signals, which is what I did, as discussed at the "Trade the Cycles" Blog last week. The short term cycle buy signal on 12-1 correctly indicated that NEM's cycle low at 46.09 that occurred just before the close on 11-30 was a short term cycle low, and, that it's downside gap at 46.12 wouldn't get filled, because if that gap got filled then 46.09 almost certainly would have been taken out and a failure of the short term cycle buy signal (that occurred on 12-1) would have indicated that the monthly cycle had turned down. NEM provided a big scare three straight sessions, hitting 46.22 on both 12-2 and 12-5, then hit 46.30 on 12-6 before rising an amazing +9.18% to 50.55 in a little over one session. I went 100% long on Friday 12-2 based on the short term cycle buy signal that occurred on 12-1 and held on through those big scares because of my system/work, but I imagine many folks got flushed out by that action or were too scared to buy. Without an understanding of cycles it might have been very difficult to weather that drastic shakeout action for three consecutive sessions, or, to know to buy.

• In the monthly downcycle it appears that HUI, NEM, and the XAU could, based on their major upcycle trendlines in the latest 1 year charts, fall in the next few weeks to 235-245 (HUI), 45-47 (NEM), and 109-114 (XAU). This implies maximum downside in the next few weeks (from 12-9's cycle highs) of -12.6% for HUI, -12.2% for NEM, and -13.5% for the XAU. A sign that the monthly cycle was in the process of peaking last week (or at least rolling over/flattening out) was NEM's extremely high volume of 9.42 million shares on 12-6, 12.94 million shares on 12-7, 7.54 million shares on 12-8, and 12.21 million shares on 12-9 versus average daily volume of 6.47 million shares the past three months.

• The COT data is basically bearish with the gold Commercial Traders trading net short and the gold Speculators trading net long, but the unusually large (> 10% increase in long position) long liquidation by the Commercial Traders points to some short term strength, but some of that strength has already occurred because the data is as of Tuesday 12-6. The gold Commercial Traders sold an unusually large (> 10% decrease in long contracts) 14,042 (added 17,312 the prior week) long futures and options contracts and covered 5276 (added 16,229 the prior week) short futures and options contracts which portends strength this week (non contrarian indicator), because the unusually large long liquidation is a short term contrarian indication and the short covering also points to strength, but the net short increase points to weakness following that strength and most or all of the strength may have occurred last week because the data is three days stale when released. The gold Speculators (hedge funds and other speculators/traders) added 9102 (sold 2697 the prior week) long futures and options contracts and added 566 (added 2309 the prior week) short futures and options contracts which portends weakness this week (contrarian indicator).

• The remainder of the charts can be found at the bottom.
  

• Williams %R is near overbought territory (above -20) for HUI (-29.70)/NEM (-30.50)/XAU (-26.90) on 12-9-05 (see latest charts). It hit an extremely overbought level (near 0) near the monthly cycle highs, which was a reliable indication to look to sell, which doesn't mean you mechanically sell, but that you probably will sell very soon or you may start selling (in 2 or 3 stages). The converse is of course true for oversold levels at or below -80, but the most important consideration by far is cycle channels/trendlines. Indicators and timing tools are used for finetuning buy/sell decisions after cycle trendline buy/sell signals suggest it's time to buy/sell (see charts above, most of you should probably be holding until a long term cycle sell signal occurs in 6 to 12 months).

• An important bullish development is that gold's major intermediate term upcycle trendline since early February has turned up/increased in strength (see 1 year chart above). Gold hit a 2% follow through minor intermediate term cycle buy signal recently (see 1 year chart above).
  

• The USD's major upcycle remains in effect but has rolled over dramatically, and, the spike move indicates that it may be putting in a major cycle high (see chart above). This jives with the COT data, which reveals that the non contrarian USD Commercial Traders are massively short and the contrarian USD Speculators are massively long. The recent rally may have been the final last gasp spike move of the USD's major upcycle this year.              
  

• The US Dollar determines 37.21% (+61% times +61% = 37.21%) of gold's price action/variability now since the USD's correlation coefficient with gold is +61% for the past 180 trading days as of 12-9-05. The USD determines 32.49% of silver's price action/variability since the USD's correlation coefficient with silver is 57% for the past 180 trading days on 12-9-05. Notice that the correlation is now positive, so gold (and silver) will get a boost if the US Dollar rises, which is the opposite of the usual negative correlation where US Dollar strength leads to gold weakness and US Dollar weakness leads to gold strength. The correlation coefficient, r, provides the direction of the correlation (+ or  -) but only the square root of the strength of the correlation. The coefficient of determination, r², provides the true strength of the correlation but without indicating its direction. Both of them must be used to fully understand the entire picture regarding correlation's effect. For the time being the US Dollar is only a very minor factor for precious metals.

• Many of the bullets that follow haven't changed from last week because this is a system ("Trade the Cycles") and because some are reading this for the first time. Some bullets are needed for reference purposes or to revisit important developments in the precious metals sector. "Trade the Cycles" is a relatively new system (began in 2003) that only reached a well developed state this year. Major buy/sell signal requirements were improved this year.
  

• The major lesson learned from the fact that the downcycle from 9-30's (all dates 2005) monthly cycle high to 10-5's cycle low was a short term/weekly one (Elliot Wave A of an A, B, C downcycle) not a monthly one is that a downcycle's trendline usually begins relatively flat. The downcycle from 9-30 to 10-5 DID begin relatively flat from a short term cycle perspective, with flatness on 9-30 that wasn't evident on the daily chart. On a daily chart a monthly downcycle trendline will almost always begin relatively flat, with one or two short term cycle highs not far below the monthly cycle highs. That was the best clue that 10-5's cycle lows probably weren't monthly ones. HUI, NEM, and the XAU's downcycle trendlines fell off a cliff from 9-30 until 10-5's cycle low on the daily charts, which meant that 10-5's cycle lows were probably short term rather than monthly cycle lows. Therefore, it's very important to keep in mind the nature of cycles and the fact that they tend to begin relatively flat. Also, the downcycle from 9-30 to 10-5 was a relatively brief and shallow downcycle by monthly downcycle standards, which was another indication that it probably wasn't the monthly cycle bottoming.

• Once a cycle's parabola/parabolic trendline breaks down it's time to get out (if you're trading that cycle timeframe), which is what happened recently, when HUI, NEM, the XAU, and gold hitting 2% follow through monthly cycle parabolic trendline sell signals in the prior monthly upcycle. HUI, NEM, and the XAU rolled over dramatically following their 2% monthly cycle sell signals, with HUI gaining only +1.41% in the nine sessions from 9-19 until 9-30. Even if modestly or even significantly higher highs occur and a monthly upcycle is still in place until proven otherwise, risk is far too high to remain long following a 2% monthly cycle parabolic trendline sell signal, because of the dramatic decline in the rate of ascent (monthly upcycle dramatically rolls over and enters the flat topping part of the cycle). The important thing to remember is that the 2% follow through parabolic trendline sell signals don't guarantee that the monthly cycle high has occurred (though it often has), but it does clearly indicate that risk is far too high to remain long because the cycle has entered the relatively flat topping area. 
  

• When an upcycle's parabolic trendline, or "parabola" as I like to call it, breaks down, substantial declines almost always occur (see first chart and the USD chart). Once a cycle dramatically rolls over (rate of ascent declines dramatically), it's usually time to take profits if you're trading that cycle timeframe. Risk skyrockets following parabolic trendline sell signals as discussed in previous updates. Sideways action is a sign that a cycle high or low has occurred or is imminent. The best time to buy or sell is usually during sideways action after a cycle's "parabola" has broken down (or is broken to the upside). Almost all cycles have parabolic shaped trendlines, but, during the final spike move (or plunge/inverse spike for downcycles) some judgement is required as to what the parabolic or nearly vertical trendline is, which is the final segment of the "parabola."
  

• You must chart the cycles for the stocks you trade/invest in, because they can be radically different than those of HUI, NEM, and the XAU. For example, CDE and SIL just hit long term cycle lows in May 2005 versus HUI, NEM, and the XAU doing so on May 10, 2004.
  

• It can take a while for a major upcycle's trendline to establish itself. HUI is more volatile and therefore tends to have more uncertainty than NEM and the XAU. This is one of the good reasons to look at three major upcycles (HUI, NEM, and the XAU) rather than one. Also, NEM, being a reliable lead indicator and the largest market cap component of HUI and the XAU, has the most important cycles. The long term upcycle's (since May 10, 2004) rising bottoms trendline didn't exist until May 16, 2005's major intermediate term cycle lows (HUI, NEM, and the XAU. See first chart above and the HUI chart dated August 5). It took slightly over a year to establish itself and ended up being very flat, probably because the long term cycle lows occurred well above the very long term upcycle trendline (see top chart above). The very important point I'm trying to make is to understand that markets do reliably experience cycles (look at the charts above) even though it can take a while for a cycle's trendline to clearly establish itself, which can lead to surprises with shorter cycles.

• The major intermediate term upcycle trendlines since May 16, 2005 for HUI, NEM, and the XAU (see charts above, gold since early February, see it's 1 year chart) should become more parabolic/sharply rising over time (clearly did recently), as cycles almost always do, and given that this should be the sharply rising phase of the long term upcycle (began on 5-10-04), dramatic gains should occur. HUI, NEM, and the XAU should approximately double from their major intermediate term cycle lows on 5-16-05 to their long term cycle highs as discussed in previous updates. This major intermediate term upcycle should last about twice as long as last year's (6 months from 5-10-04 until 11-17-04) and see about twice the gains (100% or so versus HUI's 51.50% from 5-10-04 until 11-17-04). Note in HUI's 5 year chart dated 6-29-05 (top chart above) that the long term cycles are getting longer. The previous long term upcycle's parabolic phase lasted about 9 months, so it's reasonable to assume that this one will last about one year (until May 2006).
  

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) typically weekly, so near critical times especially, you may want to check it out. Better yet, my "Trade the Cycles" Blog is updated usually two or three times a day.
  

• Gold put in a major bottom near $410 in early February, so it led the stocks pricewise but didn't flash a major buy signal until June (see 1 year chart below), a few weeks after HUI, NEM, and the XAU did (see HUI chart dated 6-3-05). So, "major cycle effect wise" gold still lagged gold stocks even though pricewise it bottomed earlier, which is the first time I've seen gold lead gold stocks pricewise. Gold stocks still led gold in that they flashed a major intermediate term cycle buy signal a few weeks before gold did.
  

• If you're trading cycles you should sell whenever a parabolic trendline breaks down for whatever cycle timeframes you're trading (trade parabolas basically, see the first chart and other charts above, that have an ever increasing rate of ascent for upcycles or an ever increasing rate of descent for downcycles, use 2% follow through for minor buy/sell signals and 5% plus the NEM Lead Indicator for major buy/sell signals as previously discussed).
  

• Most of you should not be trading minor intermediate term cycles, but should be holding for the next approximately 6 to 9 months (the HUI 5 year charts dated 6-29-05 and 5-12-05 above shows that the long term cycles are getting longer), during which dramatic gains should occur for HUI, NEM, and the XAU because this is, according to the nature of cycles, the parabolic/sharply rising phase of the long term upcycle that began on May 10, 2004. HUI, NEM, and the XAU were very flat during the early phase of their long term upcycles, which isn't too surprising since cycles tend to begin relatively flat and become increasingly parabolic/sharply rising over time.
  

• The XAU 2 year chart dated 5-16-05 above shows the Elliot Wavesque 1, 2, 3, 4, 5 cycle structure of the major intermediate term upcycle from 5-10-04 until 11-17-04 as well as the A, B, C correction from 11-17-04 until 5-16-05. The fact that there are predictable cyclical patterns for gold/silver stocks and most if not all markets is well established. The major caveat being that one must know what the longer cycles are doing in order to time shorter cycle timeframes. The predictability of the long term cycles uptrend obviously comes from the very long term upcycle since late 2000 and knowing that very long term upcycles (and downcycles) tend to last about 17.2 years. Gold's very long term downcycle lasted 21 years, from 1980 until April 2001.
  

• Gold hit a major intermediate term cycle buy signal (see 1 year chart above) in June because it followed through by more than 5% after breaking it's intermediate term downcycle trendline in place since early December 2004. This major buy signal lagged gold stocks' major buy signal by a few weeks, but this is the first time that I've seen gold hit a major bottom (early February 2005) well before gold stocks did (May 16, 2005) in this very long term upcycle since late 2000 for gold/silver stocks and since April 2001 for gold (late 2001 for silver), which is probably a major positive. Gold usually lags gold stocks at major cycle highs/lows. Gold peaked in early December 2004 versus HUI, NEM, and the XAU doing so on 11-17-04 and gold peaked in early April 2004 versus HUI and NEM doing so on 12-2-03 and the XAU doing so on 1-6-04 (long term cycle highs).
  

• Most of you will do much better holding for the next 6 to 9 months as opposed to actively trading, at which time long term cycle highs should occur for HUI, NEM, and the XAU that may be about double the level of the major lows on 5-16-05. HUI may rise on the order of 100% to about 330 in the next 6-9 months assuming a long term upcycle is in effect. NEM may rise to the 70-75 area in the next 6-9 months in that case. The XAU may rise to about 150 in the next 6-9 months in that case.

• Major intermediate term cycle lows occurred for HUI, NEM, and the XAU on 5-16-05 at 165.71 for HUI, at 34.90 for NEM, and at 78.23 for the XAU, that were above their long term cycle lows that occurred at 163.81 for HUI, at 34.70 for NEM, and at 76.79 for the XAU on 5-10-04.
  

• Looking at the top chart above, the 5 year HUI chart showing the 6 long term cycle 5% follow through buy/sell signals in the gold/silver stock very long term upcycle, one sees that all 6 long term cycle buy/sell signals correctly indicated that the long term cycle high or low was in (the NEM Lead Indicator is also needed when a potential long term cycle low occurs well above the very long term upcycle trendline as discussed previously). The probability that coincidence/pure luck led to that outcome is only 1.56% which is 50% raised to the sixth power. So, assuming that a very long term upcycle remains in effect (they last about 17.2 years on average), there's a very high probability that long term cycle buy/sell signals will work in the future. I can provide countless examples for shorter cycle timeframes where the parabolic trendline buy/sell signals worked every time. The caveat is that one must know what the longer cycles are doing (where their trendlines are) or you might use the wrong trendline and get an erroneous buy/sell signal.
  

• The correlation coefficient is the square root of the strength of the correlation. The correlation coefficient is +61% on 12-9 (+55% on 12-2) for the past 180 trading days for gold, according to Moore Research Center, Inc. For silver the correlation coefficient with the USD is +57% on 12-9 (+51% on 12-2) for the past 180 trading days. Silver's correlation is usually much more positive than gold's because it's more of an industrial metal than gold is, hence it usually has a more positive correlation with US economic strength and a strong US Dollar. 

• The Coefficient of Determination is the square of the correlation coefficient (the true strength of the correlation is determined by squaring the correlation coefficient) and explains how much the USD is determining gold's and silver's price action/variability or the S & P 500 is determining gold's or silver's price action/variability. The US Dollar determines 37.21% (+61% times +61% = 37.21%) of gold's price action/variability now since the USD's correlation coefficient with gold is +61% for the past 180 trading days as of 12-9-05. The USD determines 32.49% of silver's price action/variability since the USD's correlation coefficient with silver is 57% for the past 180 trading days on 12-9-05. The correlation coefficient, r, provides the direction of the correlation (+ or  -) but only the square root of the strength of the correlation. The coefficient of determination, r², provides the true strength of the correlation but without indicating its direction. Both of them must be used to fully understand the entire picture regarding correlation's effect.

• The report I received via e mail from Marketocracy for the week ending 12-9-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $11.56 on 12-9 vs $11.13 on 12-2, Compliant: Yes, This past week return: +3.87%." HUI (AMEX Gold Bugs Index) was up +5.36% last week for comparison, so JFR outperformed HUI in 22 of the past 47 weeks. HUI is a better yardstick than NEM or the XAU, since it usually outperforms NEM and the XAU (in upcycles). HUI was up about 70% each year in 2001, 2002, and 2003, so outperforming HUI is no easy task. My imaginary mutual fund JFR is up 15.60% since it's inception on 1-5-05. JFR is in the top 2% of Marketocracy's mutual funds for the 6 months ending 11-18-05, outperforming 98.7% of them in that timeframe.
  

• XAU Implied Volatility fell -1.14% to 29.835 on Friday 12-9 from 30.180 on 12-8 versus a -1.00% decline in the XAU on 12-9, which is a sharp (2-2.99%) 2.14% rise in complacency (-1.14% + -1.00% = -2.14%. The XAU wall of worry shrank by -2.14%, therefore complacency rose by +2.14%) that portends weakness/a downtrend during part of Monday 12-12's session (complacency is usually contrarian, therefore normally portends weakness, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That weakness/a downtrend could follow a gap up at the open and early strength. XAU Implied Volatility tends to indicate a trend/tone rather than necessarily a simplistic up or down session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. 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 0.83370 for the December expiration on 12-9 versus at 0.61331 for the December expiration on 12-2 versus at 0.78388 for the November expiration on 11-4 versus at 0.80360 for the October expiration on 10-14 versus at 0.84470 for the September expiration on 9-9 versus at 0.85337 for the September expiration on 9-2 versus at 1.02491 for the September expiration on 8-26 versus at 0.73494 for the August expiration on 8-12 versus at 0.81863 for the July expiration on 7-1 versus at 0.91027 for the July expiration on 6-24 versus at 0.76954 for the June expiration on 6-17 versus at 0.87064 for the June expiration on 6-10 versus at 0.80155 for the June expiration on 6-3 versus at 0.55895 (May expiration) on 5-19 versus at 1.13583 (May expiration) on 4-22. The XAU Put/Call Ratio was at 0.65704 for the final January expiration value as of 1-21. The XAU Put/Call Ratio was at 0.79348 for the final December expiration as of 12-17-04. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19-04. 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 strength this week (but all indicators and cycle channels/trendlines (most important consideration) must be considered collectively, not in isolation. Think "system.") is the fact that NEM outperformed the XAU last week by +1.06% (+1.02%, -1.52%, +1.16%, -1.04%, -1.26%, -1.01%, -0.69%, -0.12%, +0.80%, +0.16%, -0.19%, +1.09%, +0.51%, -1.32%, -0.40%, +0.98%, +0.52%, -0.08%, +0.26%, +0.81%, -0.91%, -1.00%, -2.86%, -0.38%, +0.09%, -0.39%, -0.72%, -0.69%, -1.87%, +0.45%, -2.15%, -1.17%, +0.10%, +1.83%, +0.08%, +0.44%, and +0.97% the prior 37 weeks): -1.23% vs -1.00% on 12-9, +1.39% vs +1.80% on 12-8, +1.72% vs +1.91% on 12-7, +4.08% vs +2.80% on 12-6, +0.78% vs +0.17% on 12-5.        

• The reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness (largely because of hedging) with only 81,912 long futures and options contracts versus 275,895 short futures and options contracts (data as of 12-6-05). The Commercial Traders typically correctly begin to take substantial profits (and sell short) as a cycle rolls over/weakens (following cycle parabolic trendline sell signals) while the Speculators tend to overshoot when making the various trading decisions (buying, selling, shorting, short covering).

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 209,921 long futures and options contracts versus only 40,509 short futures and options contracts (data as of 12-6-05).

• The gold Commercial Traders sold an unusually large (> 10% decrease in long contracts) 14,042 (added 17,312 the prior week) long futures and options contracts and covered 5276 (added 16,229 the prior week) short futures and options contracts which portends strength this week (non contrarian indicator), because the unusually large long liquidation is a short term contrarian indication and the short covering also points to strength, but the net short increase points to weakness following that strength and most or all of the strength may have occurred last week because the data is three days stale when released. The most important consideration in timing any market is the cycle channels/trendlines (see chart above) and keep in mind that the data is as of 12-6-05, so the data is somewhat stale (for short term cycle trading) by the time it's analyzed, but is highly useful nonetheless, especially for intermediate term cycle trading (a few weeks/months).

• The gold Speculators (hedge funds and other speculators/traders) added 9102 (sold 2697 the prior week) long futures and options contracts and added 566 (added 2309 the prior week) short futures and options contracts which portends weakness this week (contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines (see chart above). 

• The reliable non contrarian (in terms of their trading activity) silver Commercial Traders are short silver. They are clearly positioned for silver weakness (largely because of hedging) with only 30,851 long futures and options contracts versus 115,966 short futures and options contracts as of 12-6-05. 

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 75,641 long futures and options contracts versus only 11,252 short futures and options contracts as of 12-6-05.

• The silver Commercial Traders sold an unusually large (> 10% decrease in long contracts) 6273 (added 2054 the prior week) long futures and options contracts and covered 1760 (added 5438 the prior week) short futures and options contracts which portends strength this week (non contrarian indicator), but the net short increase points to weakness following that strength and most or all of the strength may have occurred last week because the data is three days stale when released. The most important consideration in timing any market is the cycle channels/trendlines.

• The silver Speculators (hedge funds and other speculators/traders) added 3545 (added 1592 the prior week) long futures and options contracts and covered 274 (covered 783 the prior week) short futures and options contracts which portends weakness this week (contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines.

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are positioned for US Dollar weakness (massively short) with 2804 long futures and options contracts versus 23,615 short futures and options contracts as of 12-6-05. Last week they sold 935 (added 2593 the prior week) long futures and options contracts and added 333 (covered 8963 the prior week) short futures and options contracts which portends weakness this week (non contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

• The notoriously contrarian (in terms of their trading activity) USD Speculators are positioned for US Dollar strength (massively long) with 22,879 long futures and options contracts versus 3075 short futures and options contracts as of 12-6-05. Last week they added an unusually large (> 10% increase in long contracts) 2143 (sold 10,852 the prior week) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 1188 (covered 145 the prior week) short futures and options contracts which portends USD strength this week (contrarian indicator), because the unusually large long trade is a non contrarian indication short term, but the unusually large short trade points to some weakness. The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

• FREE COT (Commitments of Traders) Charts (see link) reveal that the Commercial Traders generally know what they're doing and the Speculators don't. The Commercial Traders tend to be near net short extremes near major tops and near net long extremes near major bottoms, thus making them non contrarian indicators most of the time. The Speculators tend to do just the opposite and are contrarian indicators most of the time.

• Detailed analysis regarding the important long term upcycle buy signal and other important "big picture" information as well as information about my system/indicators can be found at this link.
  

• Cycle channels and trendlines are the primary market timing consideration (other tools/indicators are great for finetuning), except the NEM Lead Indicator is (really only) needed for major buy signals when the potential major cycle low occurs well above the next longer cycle's trendline, such as occurred on May 10, 2004 when long term cycle lows occurred for HUI, NEM, and the XAU well above their very long term upcycle trendlines in place since late 2000 (see top chart above). Since May 16, 2005's major intermediate term cycle low occurred right at the very long term upcycle trendline for the XAU (see 5 year chart dated 7-12-05), the NEM lead Indicator wasn't really required (in addition to the 5% follow through requirement), but given how long and brutal the (major intermediate term downcycle from 11-17-04 until 5-16-05) correction was we needed all the confidence we could get. In other words, if HUI, NEM, and the XAU bounce dramatically at their Bull Market/very long term upcycle trendlines or long term upcycle trendlines and 5% or more follow through occurs after breaking their major downcycle trendlines, that strongly suggests that the next longer cycle remains in effect and that a major buy signal has occurred.
  

• The 5% follow through requirement combined with the NEM Lead Indicator, the two new major buy/sell signal requirements, would have weeded out all six important cycle lows that occurred prior to 5-16-05 in the major correction (from 11-17-04 until 5-16-05), and, correctly indicated that 5-16-05 was a major intermediate term cycle low. So, the two new major buy/sell signal requirements worked seven consecutive times and there's only a 0.78% chance that result was due to pure luck (50% raised to the seventh power).

• My system/work is NOT about me making educated guesses and calling bottoms, even though I (mistakenly) did that in the major correction from 11-17-04 until 5-16-05 for HUI, NEM, and the XAU, partly for reasons such as HUI having, until early April 2005, a well developed trendline since 5-10-04's long term cycle low that appeared to be it's long term upcycle trendline. The reason why I'm developing a backtested system ("Trade the Cycles") is because it's impossible to consistently time the market (by educated guessing) using an unbacktested approach comprised of technical analysis and indicators. From now on, where major bottoms are concerned, I'll only indicate that a likely major bottom has occurred after the two major buy signal criteria are satisfied (The 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks), which would have weeded out all 6 important cycle lows (see next bullet) that occurred during the major intermediate term downcycle from being major intermediate term cycle low candidates, and there's only a 1.56% probability that was the result of pure luck (50% raised to the sixth power). Assuming that May 16, 2005 really was a major intermediate term cycle low then the two major buy signal requirements will have been effective 7 consecutive times and there's only a 0.78% chance that was the result of pure luck (50% raised to the seventh power).

• The 5% follow through major buy signal requirement (after breaking through the intermediate term downcycle trendline connecting short term cycle highs) weeds out the December 8, 2004, January 6, 2005, March 29, 2005, April 15, 2005, and the April 28 cycle lows from being a major intermediate term cycle low, but not the February 8 (HUI/XAU)/9 (NEM) 2005 cycle low. However, the NEM Lead Indicator clearly indicated (weeds out) that the February 2005 cycle low probably wasn't a major low. It appears that the 5% follow through requirement in concert with a clearly bullish NEM Lead Indicator for a few weeks will work well for timing/major buy signals. Also, an Elliot Wave type A, B, C major correction pattern is likely to occur, with point C, the major cycle low, occurring relatively close to the Bull Market/very long term upcycle trendline, which helps.
  

• Buying and holding major intermediate term upcycles (that last about 3 to 12 months) makes a lot of sense, but not long term or very long term upcycles, because they're too flat (rising bottoms) and one loses too much during major corrections (However, with good stock selection, one can do very well with buy and hold during this gold/silver stock Bull Market/very long term upcycle that began in late 2000). This is a change from my belief that one should hold during long term upcycles. One should wait for a major intermediate term cycle buy signal before buying. So, it makes sense to be long during major intermediate term cycle buy signals and in cash and/or short during major intermediate term cycle sell signals.
  

• Cycle channels/trendlines are the most important consideration when timing any market. A very long term upcycle has been in place since late 2000 and a long term upcycle has been in place since May 10, 2004 for HUI, NEM, and the XAU (gold began a very long term upcycle in April 2001). Very long term upcycles (and downcycles) tend to last about 17.5 years on average. Gold's previous very long term downcycle lasted from 1980 until April 2001.

• As I've said before, if you find that the detailed technical work is too much to digest, the cycle channels/trendlines in the charts are by far the most important consideration, so one can still use my system even if the indicators/technical work are difficult to grasp (right now, sometimes with perseverance one might grasp it).

• The Gold:XAU Ratio may become a third major buy/sell signal signal criterion, along with 5% follow through and a clearly bullish/bearish NEM Lead Indicator. Per Myles Zyblock, Chief North American Institutional Strategist at RBC Capital Markets, when it's above 5.0 (12% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been +38.4% and in only one instance was there a loss. When it's below 3.0 (5% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been -24.3% with no instances of an up year. As a stand alone indicator, at least for trading purposes, the Gold:XAU Ratio probably isn't highly useful because obviously both gold and the XAU can fall 10% or more in tandem after reaching 5.0 or rise 10%+ after reaching 3.0. However, I need to research/backtest this. 5.25 or even 5.50 is probably a better criterion.
  

• I've created a Joe F. Rocks imaginary mutual fund at Marketocracy that will trade gold/silver stocks and maybe also precious metals via Exchange Traded Funds (ETF) like GLD (new gold ETF) using my "Trade the Cycles" system. The Fund Manager name should say Joe Ferrazzano not  "joefrocks." I bought "en masse" on 1-5-05 and was more than 90% invested on that date. This will be a way of establishing an independently calculated track record. I'll track it's performance weekly in these updates, but the link above updates the fund share price/NAV the day after each session I believe.  

• The Joe F. Rocks fund at Marketocracy will provide a great independently tracked way of assessing "Trade the Cycles" as well as my trading ability and you can compare me to other market timers. I think I have a great shot at being very near the top of Marketocracy's rankings in the near future, partly because of how great the gold/silver stock market is, but also because of my "Trade the Cycles" system. Given how volatile gold/silver stocks are it would be easy to have a substandard rate of return relative to HUI and the XAU if one wasn't good at timing gold/silver stocks. I'll be doing mostly intermediate term cycle trading (cycles that last about 4-6 weeks from cycle low to the next cycle low) and some short term cycle trading. Once the long term cycle high occurs probably in about 6 to 12 months I'll be 35% in cash and will find low volatility stocks to park most of the rest of the fund. I have to be at least 65% invested, which ties my hands some, but I should still do very well. Margin and short selling aren't allowed by Marketocracy because they're following typical mutual fund guidelines. I could end up running a real mutual fund for them if I rank very high.
  

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), y