Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 1-29-06

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 (2-7 Days) - Untimely (NDX/QQQ are in short term downcycles as of 1-27-06.)
                                                           - Minor Intermediate Term Cycle (3-6 Weeks) - Timely (NDX minor intermediate term upcycle is in effect.)

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, and (unexciting because of the very long term downcycle since March 2000) long term cycle buy signals occurred shortly thereafter. 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 119 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 upcycle is in place, because a 2% follow through buy signal occurred.

The very long term downcycle (8-20 years in duration) which began in March 2000 probably has about 12 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).

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 2-3 (a minor intermediate term upcycle is in place at 1-27-06's close, which is the most important consideration, because a 2% follow through buy signal occurred) with 2.32% (623) more downtick blocks during the week ending 1-27. 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 119 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 1-27 with NASDAQ A/D at 17:12 in favor of advancing issues and NASDAQ Up/Down Volume was in favor of up volume by 7:4.

The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) shrank on Friday 1-27 with VXN revealing that a slight (up to 0.24%) rise in complacency occurred for NDX (NASDAQ 100) and QQV revealed that a modest 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 rise in complacency on Friday. The short term downcycle in place at Friday 1-27's close usually would lead to weakness/a downtrend, but, a minor intermediate term upcycle is in place (see the top chart in the group above), because a 2% follow through buy signal occurred. Better than expected economic data may result in strength.

Williams %R for NDX is at -55.25 on 1-27-06 (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 hit a minor intermediate term cycle 2% follow through buy signal recently. MACD is on a sell signal (below it's moving average). RSI is on a weak buy signal (trending up before reaching oversold territory) and Stochastics is on a sell signal. 

A slight rise in complacency occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) falling -0.24 (-1.37%) to 17.31 while NDX (NASDAQ 100) rose +20.62 (+1.22%) to 1711.11 which reveals that a slight (up to 0.24%) rise in complacency occurred for NDX because VXN fell slightly more than NDX rose (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 1-27. A minor intermediate term upcycle is in effect, because a 2% follow through buy signal occurred. 

A modest (0.25-0.49%) (+1.35% rise in QQQQ + -1.65% decline in QQV = -0.30% which is a +0.30% rise in complacency) +0.30% rise in complacency occurred for QQQQ (NASDAQ 100 Tracking Stock, +0.56 (+1.35%) to 42.11) on Friday since QQQQ rose modestly less than QQV fell (QQQ Volatility Index, -0.27 (-1.65%) to 16.07) (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 1-27. A minor intermediate term upcycle is in effect, a 2% follow through buy signal occurred.

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 -0.45 (-3.62%) to 11.97 versus a rise in SPX of +9.89 (+0.78%) to 1283.72 which was a sharp (2-2.99%) 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 significantly (S & P 500) which portends weakness in SPX on Monday, and, a short term downcycle is in place at session's end on Friday 1-27. 

The S & P 500 (SPX) is deemed Untimely on Monday due to the short term downcycle and the sharp rise in complacency. A short term downcycle is in place at Friday 1-27'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 is on a sell signal and RSI is on a weak buy signal (trending up before reaching oversold territory). Williams %R for SPX is at -31.51 on 1-27-06 (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 is in a minor intermediate term upcycle (2% follow through buy signal occurred).

The CBOE Total Put/Call Ratio at an elevated (at or above 0.75 but below 0.90) level of 0.80 at Friday's close points to modest weakness/volatility on Monday (the CBOE Index Put/Call Ratio at an extremely high 1.45 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 January 24, 2006), the Speculators (hedge funds and other speculators/traders) sold a large 1442 long futures contracts and added 348 short futures contracts which portends strength this week (contrarian indicator), but most of the strength may have occurred last week because the data is three days old when released, whereas, the Commercial Traders sold 1535 long futures contracts and added 919 short futures contracts which portends weakness this week (non contrarian indicator). NDX is in a minor intermediate term upcycle, since a 2% follow through buy signal occurred. Keep in mind that the data is three days stale when released. 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.) @ 30.8% bullish last week from 50.0% the prior week is a negative factor for the prospects of stocks during the week ending 2-3-06 because it's at a low level of bullishness (between 30-40%). 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 dramatic decline last week is a negative factor for the prospects of stocks during the week ending 2-3-06 because it's a dramatic 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 - S & P 500 (SPX) Component Newmont Mining (NEM) Is Leading To The Downside
 

• Reliable lead indicator NEM's Elliot Wave 4 probably began on 1-17-06 (see latest 1 year chart), while HUI/XAU made higher cycle highs last week thanks largely to the Fed's massive $73.50 Billion in Repos (Repurchase Agreements) during the six day stretch from 1-18 until 1-26, with $17 Billion in Repos on January 23/24, and a massive $23 Billion in Repos on January 26, which fueled index fund traders and led to a spike move last week (see 5 day HUI chart, second chart). Note that early on Thursday 1-26 a sharp rally occurred. It appears there was a rush by index fund traders to put much of the $23 Billion in new Repos to work, which bid up SPX (S & P 500) and many other indexes sharply. The fact that NEM has dramatically underperformed the XAU since 1-17-06 (see last chart in the first group) supports the scenario in which the major upcycle's (since 5-16-05, see latest 1 year charts) Elliot Wave 4 is imminent for HUI/XAU (may have begun after their early cycle highs on Friday 1-27), and probably began for NEM on 1-17-06 (see 5 day HUI chart two charts down). The major upcycle since 5-16-05 is the long term upcycle's (since 5-10-04) sharply rising/parabolic major upcycle. The prior long term upcycle's parabolic major intermediate term upcycle Elliot Wave 4 lasted seven weeks and the XAU declined -25.11% (see XAU chart dated 5-16-05), and, probably will coincide closely with this one, since the XAU's parabolic major upcycle Elliot Wave 3 peaked on January 24, 2003 at 82.89 and declined until March 13, 2003, when an Elliot Wave 4 cycle low occurred at 62.08. Since the long term cycles are getting substantially longer (see first chart), this Elliot Wave 4 correction is likely to last over 7 weeks and the declines (HUI, NEM, and the XAU) could exceed the -25.11% that occurred for the XAU and the -26.59% that occurred for HUI in 2003's Wave 4 correction. HUI's Elliot Wave 4 correction in 2003 began at 153.40 on 1-27-03 (may have peaked on 1-27 in the current major upcycle), and, hit an Elliot Wave 5 cycle low at 112.61 on 3-13-03, which was a -26.59% correction. The good news is that this likely substantial correction is probably a prerequisite for the next huge run in the major upcycle's Elliot Wave 5, during which HUI is likely to rise to 370-400, which is another upward revision from last week's 350-380 (originally 330-350), because HUI approached 330 on Friday 1-27, making the 350-380 target range for Elliot Wave 5, when a long term cycle high will occur, seem too conservative. Also, it appears very likely that long term cycle highs will occur well after the originally estimated May of this year, and may not occur until the second half of the year.     
  

• "Trade the Cycles" Near Term Synopsis - Federal Reserve Bank Credit (released after Thursday 1-26's close) for the week ending 1-25 fell -$4.476 Billion (see http://www.federalreserve.gov/releases/h41/Current/), which portends a very sharp decline the next few days, and may have begun after Friday's early spike move (see 5 day HUI chart, second chart). The weekly Fed Credit figure reliably portends substantial moves when it rises or falls sharply. Friday 1-27's Repo (Repurchase Agreement) was a relatively modest $5.75 Billion 3 day Repo. In HUI's 5 day chart dated 1-27-06 (second chart) note the rally that Thursday 1-26's massive $23 Billion in Repos from the Fed created. In NEM's 1 year chart dated 1-20-06 (chart from last week) note the Elliot Wave 1, 2, 3, 4, 5 minor intermediate term upcycle from 5-16-05 until 9-30-05, which is why I believe 9-30-05 was the major upcycle's Elliot Wave 1 cycle high and arrived at the current count, with 1-17's cycle high being the end of Wave 3 for NEM, and, a Wave 3 cycle high being imminent for HUI/XAU. NEM has downside gaps to fill at 56.97 from 1-25, at 53.40 from 1-3, at 51.59 from 12-28, at 50.45 from 12-22, and at 48.75 from 12-7, and, the XAU has downside gaps at 141.29 from 1-25, at 137.64 from 1-19, at 135.39 from 1-6, at 128.03 from 1-3, at 124.36 from 12-28, and at 122.49 from 12-22. Often cycle highs or lows will occur shortly after gaps get filled, so one needs to track gaps closely. If gaps don't get filled that can be a bearish or bullish sign, as occurred recently when NEM twice closely approached (daily cycle lows at 48.88 and 48.89) but didn't fill it's downside gap at 48.75, then the recent explosive rally occurred. The Elliot Wave 3 minor int term cycle highs are important though not major/final cycle highs, because the major upcycle's Elliot Wave 5 cycle high probably lies ahead of us and should occur in the 370-400 range for HUI, based on extrapolating the prior long term cycle highs since late 2000 when the Bull Market/very long term upcycle began. HUI, NEM, and the XAU will probably do a down, up, down, Elliot Wave A, B, C minor int term downcycle, which is probably the major upcycle's (since 5-16-05) Elliot Wave 4 down. HUI, NEM, and the XAU could, based on their major upcycle trendlines (see latest 1 year charts), fall to (I revised these to be conservative based on the previous parabolic major upcycle's Wave 4 correction in 2003, in which -25%+ declines occurred for HUI/XAU) 240-250 (HUI), 45-47 (NEM), and 112-117 (XAU), which means that Elliot Wave 4 down could result in declines of 25% or more, and, could last over two months. Gold hit a 2% follow through minor intermediate term cycle sell signal six weeks ago, and, the minor intermediate term upcycle's rate of ascent has declined (peaks are rolling over), but not as much as it normally would because the long term upcycle is very strong now.
  

• "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.

• As discussed at the "Trade the Cycles" Blog (see link): "If the S & P 500 (SPX) crashed 10% in the matter of a few days or even a few weeks (which would of course be a correction not a crash), NEM, FCX (both in SPX) and gold/silver stocks in general would also crash due to index fund traders mechanically selling the gold/silver stocks in their indexes. You're correct that the big picture is a gold Bull (since late 2000 for gold stocks) vs a major averages Bear since March 2000. The major cycles are vastly different, the minor gold/silver stock cycles are profoundly affected by SPX due to index fund trading. SPX drives the action in many indexes, so many gold/silver stocks are affected. Some examples: Gold/silver stocks minor int term upcycle since 10-20-05 for HUI/XAU coincided closely with SPX's, which began about a week earlier. HUI/XAU's correction in Sept/Oct 2005 coincided closely with SPX's. In 2003 SPX rose dramatically and so did HUI/XAU. In April/May 2004 when HUI/XAU had a 6 week sharp correction it coincided closely with SPX's correction. In July 2004 HUI/XAU had another correction that coincided with SPX's. A true brief crash in SPX WILL crash gold stocks, and, even a correction will drag gold stocks down substantially due to index fund selling. Later this year when SPX has a dramatic correction, so will HUI/XAU. Index funds are a huge factor now."     

• The Major Upcycle's (Since 5-16-05) Elliot Wave 3 minor int term upcycle since 10-20-05 for HUI/XAU and since 11-4-05 for NEM was comprised of two monthly cycles, with monthly cycle lows occurring again on December 20, 2005 (see XAU 3 month chart dated 1-20-06). The 6 day A, B, C correction in mid December (see XAU 3 month chart dated 1-20-06) was a monthly downcycle. The 2% follow through monthly cycle buy signal indicated that a new monthly upcycle was in effect. Elliot Wave is highly useful because it provides the likely cycle structure for both the major and minor int term cycles.

• The latest COT data (as of 1-24-06) is bullish short term since the gold Commercial Traders traded net long and the gold Speculators traded net short, both of which portend strength for at least part of this week, but the data is three days old when released, so most of the strength may have occurred last week, and the Commercial Traders only added a modest 343 long contracts, and, covered a large number of short contracts. They also were surprised (as I was) by last week's strength due to the Fed's massive lending, because they added a large 11,306 short contracts the prior week in anticipation of substantial weakness. The gold Commercial Traders added 343 (added 10,554, 13,289, 6357 the prior three weeks, sold 1381, 8157 the prior two weeks) long futures and options contracts and covered a large 8435 (added 11,306, 4626, 3299 the prior three weeks, covered 2036 the prior week, added 4202, 2623 the prior two weeks) short futures and options contracts which portends strength this week (non contrarian indicator), but most of the strength may have occurred last week because the data is three days old when released, and the very modest long trade suggests that caution is in order. The gold Speculators (hedge funds and other speculators/traders) sold 6157 (added 5541, 2975, 1521 the prior three weeks, sold 3988, 5112, 19,247 the prior three weeks) long futures and options contracts and added 1783 (added 3743, 9445, 5824 the prior three weeks, covered 1535, 7432, 8720 the prior three weeks) short futures and options contracts which portends strength this week (contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

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

• Repurchase agreements (RPs or Repos) are a huge factor for Federal Reserve Bank Credit. I'm still in research mode but it looks like there's huge borrowing going on to buy index futures/options and baskets of indexes' components (index fund trading I've been discussing which is a huge factor for gold/silver stocks and many other sectors) courtesy of the Fed's Open Market Operations ( http://app.ny.frb.org/markets/omo/dmm/temp.cfm ) which leads to occasional dramatic spikes in the stock market when there's a large increase in borrowing from the prior day/week or occasional dramatic plunges when there's a large decrease in borrowing from the prior day/week (Federal Reserve Bank Credit spikes or plunges http://www.federalreserve.gov/releases/h41/Current/ ). The US repo market reached USD 5 trillion (!) at the end of 2004 AND is growing at a two-digit pace, which means it's growing at over $500 Million/year!, so index fund trading is becoming even more of a factor.

  The US Federal Reserve and the European Repo Council (a body of the International Securities Market Association) both try to estimate the size of their respective repo markets. At the end of 2004, the US repo market reached USD 5 trillion and the European one passed EUR 5 trillion in outstandings. Both are growing at a two-digit pace. http://en.wikipedia.org/wiki/Repurchase_agreement

• It's becoming obvious that the reason why NEM is such a good lead indicator for HUI/XAU (see link) is because it's a component of SPX (S & P 500), and, since SPX is the 800 lb gorilla of indexes, it drives index fund trading, hence SPX is the ultimate lead indicator for HUI/XAU and many other indexes. Luckily however SPX's cycles don't match gold/silver stocks' cycles. SPX is in a very long term downcycle/primary Bear Market since March 2000 while HUI, NEM, and the XAU are in a very long term upcycle/primary Bull Market since October (NEM/XAU)/November (HUI) 2000. However, SPX obviously has a profound affect on gold/silver stocks' minor intermediate term and short term cycles due to index fund trading. Rapid modest % moves in SPX cause rapid significant moves in NEM and other gold/silver stocks in the many indexes affected by SPX.
  

• Williams %R is in or near overbought territory (above -20) for HUI (-14.10)/NEM (-23.80)/XAU (-16.40) on 1-27-06 (see latest charts). It typically hits an extremely overbought level (near 0) near monthly cycle highs, which is 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).
  

• The USD's major intermediate term upcycle appears to have finally peaked, but 5% follow through is required for a major sell signal, and, will confirm that a major intermediate term cycle high occurred in mid November 2005 (see chart above).               
  

• The US Dollar determines 22.09% (+47% times +47% = 22.09%) of gold's price action/variability now since the USD's correlation coefficient with gold is +47% for the past 180 trading days as of 1-27-06. The USD determines 27.04% of silver's price action/variability since the USD's correlation coefficient with silver is 52% for the past 180 trading days on 1-27-06. 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 in 2005. Major buy/sell signal requirements were improved (really were developed for the first time) in 2005.
  

• 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 sell signal occurs 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 a recent 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 2005. 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. Also, 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 2005 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 +47% on 1-27 (+54% on 1-20) for the past 180 trading days for gold, according to Moore Research Center, Inc. For silver the correlation coefficient with the USD is +52% on 1-27 (+58% on 1-20) 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 22.09% (+47% times +47% = 22.09%) of gold's price action/variability now since the USD's correlation coefficient with gold is +47% for the past 180 trading days as of 1-27-06. The USD determines 27.04% of silver's price action/variability since the USD's correlation coefficient with silver is 52% for the past 180 trading days on 1-27-06. 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 1-27-06: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $14.33 on 1-27 vs $13.51 on 1-20, Compliant: Yes, This past week return: +6.07%." HUI (AMEX Gold Bugs Index) was up +6.82% last week for comparison, so JFR outperformed HUI in 26 of the past 54 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 43.30% 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 -1.39% to 34.435 on Friday 1-27 from 34.920 on 1-26 versus a +0.55% rise in the XAU on 1-27, which is a significant (0.50-1.99%) +0.21% rise in complacency (-1.39% + +0.55% = -0.84%. The XAU wall of worry shrank by -0.84%, therefore complacency rose by +0.84%) that portends weakness/a downtrend during part of Monday 1-30'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 1.19527 for the February expiration on 1-27 versus at 1.42489 for the February expiration on 1-20 versus at 1.17922 for the expired January expiration on 1-20 versus at 1.10113 for the January expiration on 1-13 versus at 0.90369 for the expired December expiration on 12-16 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 weakness 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 underperformed the XAU last week by -0.14% (-4.36%, +2.21%, -1.05%, +0.41%, +0.69%, +2.15%, +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 44 weeks): +0.78% vs +0.55% on 1-27, +1.10% vs +1.37% on 1-26, +1.98% vs +1.93% on 1-25, -0.42% vs -0.09% on 1-24, +1.10% vs +0.92% on 1-23.        

• 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 114,322 long futures and options contracts versus 291,479 short futures and options contracts (data as of 1-24-06). 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 185,454 long futures and options contracts versus only 43,617 short futures and options contracts (data as of 1-24-06).

• The gold Commercial Traders added 343 (added 10,554, 13,289, 6357 the prior three weeks, sold 1381, 8157 the prior two weeks, added 11,405 the prior week, sold 14,042 the prior week) long futures and options contracts and covered a large 8435 (added 11,306, 4626, 3299 the prior three weeks, covered 2036 the prior week, added 4202, 2623 the prior two weeks) short futures and options contracts which portends strength this week (non contrarian indicator), but most of the strength may have occurred last week because the data is three days old when released, and the very modest long trade suggests that caution is in order. 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 1-24-06, 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) sold 6157 (added 5541, 2975, 1521 the prior three weeks, sold 3988, 5112, 19,247 the prior three weeks, added 9102 the prior week, sold 2697 the prior week) long futures and options contracts and added 1783 (added 3743, 9445, 5824 the prior three weeks, covered 1535, 7432, 8720 the prior three weeks) short futures and options contracts which portends strength 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 32,582 long futures and options contracts versus 110,912 short futures and options contracts as of 1-24-06. 

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 62,727 long futures and options contracts versus only 6361 short futures and options contracts as of 1-24-06.

• The silver Commercial Traders sold 1760 (added 10 the prior week, sold 1188 the prior week, added 621 the prior week, sold 665 the prior week) long futures and options contracts and covered 4158 (added 413 the prior week, covered 1239 the prior week, 151 the prior two weeks, added 1454, 1903 the prior two weeks) short futures and options contracts which portends strength this week (non contrarian indicator), but the sale of 1760 long futures/options contracts points to some weakness. The most important consideration in timing any market is the cycle channels/trendlines.

• The silver Speculators (hedge funds and other speculators/traders) added 2413 (sold 350, 1735, 2219 the prior three weeks, added 1565 the prior week, sold 6111 the prior week) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 1465 (added 150 the prior week, covered 1376, 1031 the prior two weeks, added 55 the prior week) short futures and options contracts which portends weakness this week (contrarian indicator), because the unusually large short trade is a short term non contrarian indication. 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 (net short) with 14,104 long futures and options contracts versus 15,562 short futures and options contracts as of 1-24-06. Last week they added an unusually large (> 10% increase in long contracts) 2134 (added 1893, 1148, 1525 the prior three weeks, sold 806, 964 the prior two weeks) long futures and options contracts and added 395 (added 951 the prior week, covered 5422 the prior week, added 1189 the prior week, covered 386, 8250 the prior two weeks) short futures and options contracts which portends weakness this week (non contrarian indicator), because the unusually large long trade is a short term contrarian indication, and the short selling also portends weakness. 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 (net long) with 10,440 long futures and options contracts versus 6548 short futures and options contracts as of 1-24-06. Last week they added 343 (sold 82, 4033 the prior two weeks, added 959 the prior week, sold 309, 7347, 1970 the prior three weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 1206 (added 126, 1657, 1459 the prior three weeks, covered 690, 653 the prior two weeks, added 369 the prior week) short futures and options contracts which portends USD weakness this week (contrarian indicator), because the unusually large short selling is a non contrarian indication short term. 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), 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 1-27 = Negative. Downtick block trades outpaced uptick block trades (623 more downtick blocks) by 2.32% (1.36% more downtick blocks the prior week, 0.96% more uptick blocks the prior week, 1.52% more downtick blocks the prior week, 0.59% more uptick blocks the prior week, 1.21%, 0.56%, 0.84%, 3.33%, 3.04%, 0.58%, 1.93% more downtick blocks the prior seven weeks, 0.57%, 1.67%, 0.21%, 3.11% more upticks the prior four weeks, 0.90% more downtick blocks the prior week, 1.46%, 6.33% more upticks the prior two weeks, 3.32%, 2.09%, 0.61%, 0.07% more downticks the prior four weeks, 0.09%, 1.30% more upticks the prior two weeks, 0.12%, 1.15%, 1.26%, 3.60% more downticks the prior four weeks, 1.10%, 3.85%, 4.06% more upticks the prior three weeks, 0.74%, 0.89%, 0.02%, 3.36% more downticks the prior four weeks, 1.73% more upticks the prior week, 1.44% more downticks the prior week, 0.44% more upticks the prior week, 0.27% more downticks the prior week, 2.62% more upticks the prior week, 1.71% more downticks the prior week,1.42%, 0.89%, 5.86%, 2.63% more upticks the prior four weeks, 0.31%, 1.53% more downticks the prior two weeks, 2.49% more upticks the prior week, 0.49% more downticks the prior week, 0.10%, 0.52% more upticks the prior two weeks, 1.17% more downticks the prior week, 0.24%, 1.91% more upticks the prior two weeks, 5.35%, 4.73%, 1.55%, 2.15%, 3.26%, 5.82%, 1.77%, 3.04%, 2.77%, 4.76%, 2.16%, 0.80%, 1.13%, 4.28% more downticks the prior 14 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 65 months) 1.5% 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 119 weeks with substantially negative money flow.

NYSE block trading data reveals very strong net buying during the week ending 1-27 though I don't tally it. Inflows have been very strong for more than three years. 

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

Alternatively or in addition to Mind-it, why not make Joe F. Rocks! your start page. In Internet Explorer under "Tools" select "Internet Options" then select "General" where you can set your start page to http://www.joefrocks.com/ .

If you entered Joe F. Rocks! on this page please check out the home page and the considerable resources that this site has to offer and don't forget to save it to your favorite places.
 

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