Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 6-12-05

Growth Stock (NASDAQ) Timeliness - Monday - Timely but Risky (Strength/an uptrend, that could follow a gap down at the open, during "much" of Monday's session is a "hit!.")
                                                           - Very Short Term (2-3 Days) - Untimely (NDX/QQQ are in short term downcycles)
                                                           - Short Term (1-3 Weeks) - Untimely (NDX short intermediate term cycle since late April has turned down and VXN (NDX implied volatility index/wall of worry) fell dramatically recently.)

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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Analysis/Commentary -

The NASDAQ Composite (COMPX) opened slightly lower on Friday 6-10, but, COMPX trended sharply lower much of the session, spent the entire session in negative territory, and closed significantly lower at 2063.00, -13.91 (-0.67%).

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).

and a long intermediate term upcycle has begun, at least for NDX. NDX is now on a major intermediate term cycle buy signal. See the 2 year NDX chart 3 charts below.

"Eerie Nikkei-SPX Parallels" (At Zeal) shows the high degree of correlation between the S & P 500's and NASDAQ's post bubble behavior and that of the Japanese stock market that experienced a bubble in 1989 and remains at much lower levels 15 years later.

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 86 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.

The very long term downcycle (3-10+ 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).

Risky NDX long term cycle buy signal because of the very long term downcycle since March 2000 and outflows nearly every week the past 86 weeks. A major intermediate term cycle buy signal is in effect for NDX and the short intermediate term upcycle may have hit a cycle high.

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 intermediate term cycle agrees with it) weakness this week ending 6-17 (a short intermediate term downcycle is in place as of 6-10-05, which is the most important consideration) with 0.74% (144) more downtick blocks during the week ending 6-10. 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 86 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 negative on Friday 6-10 with NASDAQ A/D at nearly 8:7 in favor of declining issues and NASDAQ Up/Down Volume was in favor of down volume by more than 2:1.

The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) grew on Friday 6-10 with VXN revealing that a sharp (2-2.99%) rise in fear occurred for NDX (NASDAQ 100) and QQV revealed that a significant (0.50%-1.99%) rise in fear occurred for QQQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed Timely but Risky on Monday due to the short term downcycle and the fact that the short intermediate term cycle since late April has turned down. A short term downcycle was in place at Friday 6-10's close that may lead to weakness/a downtrend if it remains in place. Worse than expected economic data may result in weakness.

Williams %R for NDX is in very oversold territory at -90.45 on 6-10-05 (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), which occurred three weeks ago (see the first chart in the group above). MACD is on a sell signal (below it's moving average). RSI and Stochastics are on sell signals.  

A sharp rise in fear occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) rising +0.60 (+3.93%) to 15.87 while NDX (NASDAQ 100) fell -18.44 (-1.20%) to 1521.02 which reveals that a sharp (2-2.99%) rise in fear occurred for NDX because VXN rose much more than NDX fell (NDX wall of worry grew) which portends strength in NDX on Monday, but, a short term downcycle was in place at session's end on Friday 6-10 and the short intermediate term cycle since late April has turned down. 

A  significant (0.50%-1.99%, -1.06% decline in QQQQ + +2.34% rise in QQV = +1.28% which is a 1.28% rise in fear) 0.01% rise in fear occurred for QQQQ (NASDAQ 100 Tracking Stock, -0.403 (-1.06%) to 37.547) on Friday since QQQQ fell significantly less than QQV rose (QQQ Volatility Index, +0.33 (+2.34%) to 14.43) (QQQQ wall of worry grew) which portends strength in QQQQ on Monday, but, a short term downcycle was in place at session's end on Friday 6-10 and the short intermediate term cycle since late April has turned down. 

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 -0.12 (-0.99%) to 11.96 versus a decline in SPX of -2.82 (-0.23%) to 1198.11 which was a significant (0.50-1.99%) rise in complacency (wall of worry shrank) for the S & P 500/value stocks (SPX is about 75% value stocks) since VIX fell significantly despite SPX falling slightly (S & P 500) which portends weakness in SPX on Monday, but, a short term upcycle was in place at session's end on Friday 6-10. 

The S & P 500 (SPX) is deemed Untimely on Monday due to the fact that the short intermediate term cycle since mid April has probably turned down. A short term upcycle was in place at Friday 6-10's close which may lead to strength on Monday if it remains in place. Better than expected economic data may result in some strength. An intermediate term cycle (1 to 12 months) parabolic trendline (connecting daily cycle highs) buy signal occurred nine weeks ago. MACD is on a sell signal (below it's moving average). Stochastics and RSI are on sell signals. Williams %R for SPX is at -46.92 on 6-10-05 (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)). 

The CBOE Total Put/Call Ratio at a moderate (at or above 0.50 but below 0.75) level of 0.71 at Friday's close points to neither strength or weakness on Monday (the CBOE Index Put/Call Ratio at an extremely high 1.55 points to weakness/volatility) because it's a reliable non-contrarian indicator of the next session's early action except at extremely high (at or above 1.05) or extremely low levels (at or below 0.50) where it sometimes is also a contrarian indicator (sometimes portends early substantial strength (below 0.50) or a sharp rally following early potentially severe weakness (at or above 1.05), judgement is involved). Please keep in mind that cycle channels/trendlines are the most important consideration when timing any market.

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

Looking at NASDAQ 100 (NDX) Chicago Mercantile Exchange Commitments of Traders - Futures Only (Reportable Positions as of June7, 2005), the speculators (hedge funds and other speculators/traders) sold 146 long contracts and covered an unusually large (> 10% decrease in short position) 1494 short contracts which portends strength this week (unusually large decrease in the short position is the non contrarian case short term for this normally contrarian indicator), whereas the commercial traders sold 287 long contracts and added 726 short contracts which portends weakness this week (non contrarian indicator). NDX COT (do an edit then find "nasdaq" in Internet Explorer or Netscape to find it because it's near the bottom)

American Association of Individual Investors (AAII) % Bullish (AAII has been a useful non-contrarian sentiment indicator at very low levels below 40% bullish and very high levels above 60% bullish.) @ 46.0% bullish last week from 48.6% the prior week is a neutral factor for the prospects of stocks during the week ending 6-17-05 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 6-17-05 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 - HUI, NEM, XAU Monthly Cycle Buy Signals Occurred On Friday June 10 

• Short intermediate term/monthly cycle lows probably occurred on June 9 at 181.67 for HUI, at 36.38 for NEM, and at 84.13 for the XAU, because they followed through by more than 2% after breaking their parabolic shaped downtrendlines since June 2, which is a monthly cycle buy signal, as illustrated in HUI and the XAU's one month charts below.
  

• A monthly cycle probably ended on Thursday June 9 and lasted 17 sessions (began May 16), which is about 5 sessions shorter than average. The down leg of that cycle lasted about 5 sessions (Thursday June 2 until June 9). See HUI/XAU 1 month charts below.
  

• Cycle highs for the short intermediate term upcycle that began on 5-16-05 occurred on June 2 at 195.73 for HUI, at 38.85 for NEM, and at 90.14 for the XAU. In the space of only twelve sessions HUI rose from 165.71 to 195.73 which was a very respectable 18.16% rise, NEM rose from 34.90 to 38.85 for a respectable gain of 11.32%, and the XAU rose from 78.23 to 90.14 which was a very respectable 15.22% rise.
  

• One day after the likely monthly cycle lows on June 9 a buy signal occurred, but the spike move on Friday June 10 means weakness is likely at some point on Monday June 13. The fact that NEM underperformed the XAU by -0.45% on June 10 also points to weakness as does the gold COT data. The gold Commercial Traders sold a large 6390 (23,530 sold the prior week, 11,214, 860, 11,417, 9363 added the prior four weeks) long futures and options contracts and added 8457 (37,593, 8497, 29,470, 17,544, 26,014 covered the prior five weeks) short futures and options contracts which portends weakness this week (non contrarian indicator). XAU Implied Volatility reveals that a +1.90% rise in fear occurred on 6-10 which points to strength during part of Monday 6-13's session. That strength/uptrend could occur after a gap down at the open and early weakness. The indicators portend a tone/trend for a session rather than a simplistic up or down session. Cycle channels/trendlines are the most important consideration for timing any market. Also, the spike move on Friday 6-10 was weakening/flattening out near session's end, so weakness appears likely early on Monday 6-13.
  

• If June 9's cycle lows are the start of a new monthly/short intermediate term cycle, the fact that they occurred farther above the May 16 cycle lows than I expected is probably explained by the fact that this is probably the parabolic/sharply rising segment of the long term upcycle that began on May 10, 2004. So, the uptrendline connecting intermediate term cycle lows should have a considerably sharper rate of ascent than the very flat first segment of the long term upcycle trendline from May 10, 2004 until May 16, 2005 (see NEM 2 year chart below).
  

• June 9's monthly cycle lows may be poiut 2 of a likely Elliot Wavesque pattern (see XAU chart dated 5-16-05 below for previous cycles) with point 1 being the 1 month cycle highs on June 2. The monthly cycles/short intermediate term cycles typically have 2 to 4 week upcycles and 1 to 2 week downcycles. 

• Now I'm going to discuss how to time the 1 monthish cycles that gold/silver stocks typically have. The monthly cycle's parabolic trendlines for HUI (see 1 month chart below), NEM, and the XAU (see 1 month chart below that only shows the downcycle's parabolic trendline) were the reason I was able to say last week that June 2 might be a short intermediate term/monthly cycle high. The straight trendline for HUI and the XAU's monthly upcycle that connects short term cycle lows, is not shown on the charts, but would be the third segment of the upcycle's trendline extended, was too flat and one would have given back substantial profits if the straight trendline was used. Based upon backtesting I did last week, gold/silver stocks usually hit monthly cycle highs prior to the parabolic trendline sell signal, which is what happened in the previous monthly cycle for HUI, NEM, and the XAU.
  

• For gold/silver stocks one should sell everything after the parabolic trendline breaks down (if you're trading the monthly cycles), since risk skyrockets and reward plummets. The SPX (S & P 500) 3 month chart below is an example where the short intermediate term upcycle hasn't peaked before the parabolic trendline breaks down, but the rate of ascent declines dramatically and risk soars. Gold/silver stocks tend to hit monthly cycle highs prior to the parabolic trendline sell signal, based on looking back/backtesting 2 years for HUI, NEM, and the XAU. See the parabolic trendline sell signal for SPX's short intermediate term upcycle since mid April in the first chart below. Risk skyrockets after this sell signal and reward/rate of ascent plunges. Gold/silver stocks tend to hit cycle highs prior to the parabolic trendline sell signal for (what for them is usually) monthly cycles. SPX's (S & P 500) short intermediate term upcycle straight trendline was too flat for trading purposes (see 3 month chart below) and after the parabolic trendline sell signal the upcycle's rate of ascent declined dramatically (risk/reward ratio soars).

• See HUI's 1 month chart below that illustrates timing the previous monthly cycle and the first chart below, the SPX 3 month chart, shows how important the parabolic trendline is. This discussion is only for the relatively small percentage of nimble traders that trade monthly or weekly cycles (can use parabolic trendlines for short term cycles or any cycle timeframe). Most of you will do much better holding for the next 6 to 9 months, 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.
  

• The long term upcycle since May 10, 2004 has probably turned up and entered it's parabolic/sharply rising phase, which is great news for gold/silver bugs. The next 6-9 months should be great. See the NEM 2 year chart below. This means that unless you're a nimble experienced trader you should hold for the next 6 to 9 months until a long term cycle high occurs.
  

• The shallow monthly cycle correction in which HUI, NEM, XAU retraced about half their monthly upcycle's point gains is a good sign that the long term upcycle has probably "gone parabolic."
  

• HUI, NEM, and the XAU followed through by more than 5% after breaking their intermediate term downcycle trendlines in place since 11-17-04 (see HUI chart dated 6-3-05). Therefore, major buy signal requirement number two has been satisfied, with requirement one, a clearly bullish NEM Lead Indicator, being satisified by the recent five week stretch in which NEM significantly outperformed the XAU. The two major buy signal requirements would have weeded out all six previous important cycle lows in the major correction from being major cycle low candidates, and, there's only a 1.56% chance that result was due to pure luck (50% raised to the sixth power).
  

• If the two major buy signal requirements correctly indicate that May 16, 2005 is a major bottom, then the chance that pure luck led to those requirements weeding out the six important cycle lows and correctly calling the major bottom will be 50% raised to the seventh power or 0.78%. So, if May 16, 2005 is a major bottom there's a good chance that the two major buy signal requirements will be effective in the future. Also, the additional confidence factors discussed shortly will be very useful for assessing risk and the likelihood that a major bottom has occurred.
  

• "Trade the Cycles" indicates that HUI, NEM, and the XAU are now on a major intermediate term cycle buy signal. Gold/silver stocks are in a very long term upcycle/true Bull Market since October/November 2000 (see 5 year charts for HUI, NEM, and the XAU below) and, until proven otherwise, are in a long term upcycle since May 10, 2004. Major intermediate term cycle highs occurred for HUI, NEM, and the XAU on 11-17-04. Gold peaked a few weeks later, lagging the stocks as it usually does at major highs/lows. Gold began a very long term upcycle/true Bull Market in April 2001 and silver did so in late 2001.

• The other major buy signal criteria that was satisfied is the NEM Lead Indicator which was bullish for five straight weeks. NEM outperformed the XAU during the five weeks ending 4-22 by +0.10%, +1.83%, +0.08%, +0.44% and +0.97%. See the 3 month chart below, which is the last chart in the first group below.
  

• Major intermediate term cycle lows probably 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.
  

• Additional confidence factors that point to May 16 being a major bottom include the fact that the gold Commercial Traders added aggressively to their long position for a few weeks following the major bottom in addition to engaging in massive short covering, the USD Commercial Traders are now massively short, reliable lead indicator NEM rallied on well above average volume, the XAU Put/Call Ratio (June expiration) remained steady near 0.80 in recent weeks (despite a substantial rally) which indicates that many doubt the low is in, XAU Implied Volatility spiked dramatically near the May 16, 2005 major intermediate term cycle low (rose to 32 area from below 25 in early April 2005) in similar fashion to what occurred near the May 10, 2004 long term cycle low (rose to 42.50 area from 30.50 area in early April 2004), and an Elliot Wavesque A, B, C correction pattern culminated on May 16, 2005. If one is risk averse one can wait for a higher short intermediate term cycle low (about a one month low), which would confirm that May 16 is a major bottom (a rising bottoms long intermediate term upcycle trendline would be in place).
  

• Keep in mind that this major upcycle probably is the parabolic/sharply rising segment of the long term upcycle that probably began on 5-10-04, therefore this major (intermediate term) upcycle will probably far surpass the 51.50% gain that HUI experienced from 5-10-04 until 11-17-04, which was a major intermediate term upcycle and probably the first very flat segment of the long term upcycle. HUI may rise on the order of 100% to about 330 in the next 6-12 months assuming a long term upcycle is in effect. NEM may rise to the 70-75 area in the next 6-12 months in that case. The XAU may rise to about 150 in the next 6-12 months in that case.
  

• The USD is likely to break down this week per the COT data, and, it's experiencing a dramatic spike move which suggests that gold will probably be strong, at least part of the week, assuming that the USD breaks down. Please see the six month USD chart below. When the US Dollar spike move breaks down it's likely to fall hard and fast, which is typical behavior following dramatic spike moves. The more dramatic the spike move the more dramatic the breakdown tends to be.
  

• It's important to keep in mind that NEM's gap to 40.25ish (created in late April) may get filled this week.
  

• Williams %R is at or near overbought territory (above -20) for HUI (-15.30)/NEM (-21.30)/XAU (-16.80). If it hits an extremely overbought level near 0 that's a reliable indication to  to look to take profits.

• Some bullets don't change from week to week because this is a system ("Trade the Cycles") and the info is/may be needed to know what's going on (for reference purposes) and because some are reading this for the first time.
  

• It's likely that there won't be an update next weekend. May the force be with you!
  

• One should be using cycle trendlines for investing/trading decisions (buy/sell signals). If a trendline breaks down unexpectedly as HUI's did in early April one MUST SELL. You have to use a very disciplined approach or you'll occasionally suffer very substantial losses that may take months and possibly over a year to recover from.
  

• The COT (Commitments of Traders) data (as of 6-10-05) for gold, silver and the USD clearly points to a continuation of the gold Bull Market/very long term upcycle that began in April 2001 (HUI, NEM, and the XAU's began in October/November 2000 and silver's began in late 2001) and a continuation of the USD Bear Market/very long term downcycle that began in June 2001. The reliable non contrarian gold Commercial Traders sold 6390 (sold 23,530 the week before, added 11,214, 860, 11,417, 9363 the prior four weeks) long futures/options contracts, correctly anticipating a 1 month cycle high in gold stocks on June 2 (cycle began May 16) and that the metal probably hasn't bottomed yet (usually lags the stocks). Also, they appear to have completed the massive short covering they had been engaged in for five weeks, adding a large 8457 (37,593, 8497, 29,470, 17,544, 26,014 covered the prior five weeks) short futures and options contracts which portends weakness this week (non contrarian indicator). The massive short covering in 5 of the past 6 weeks is a major positive on an intermediate term cycle basis (weeks/months).
  

• The big news again this week is the huge manner that the silver Speculators traded long last week (data as of 6-7-05) and, as usual, the silver Commercial Traders did the opposite, which normally portends potentially substantial strength in silver this week, because the unusually large (> 10% changes in their long (Speculators) and short (Commercial Traders) positions) trades generally make the Speculators short term non contrarian and the Commercial Traders short term contrarian. However, that indication was wrong last week since silver fell sharply. I think when the Speculators "go crazy"and make huge trades/get very greedy they revert to their normally contrarian status and tend to blunder which makes sense. The week before last the silver Speculators increased their long position by over 41% which was a huge increase in one week. I've seen this before in the gold COT data also, when the gold Speculators made a huge long trade very near gold's major top in early December 2004. The silver Speculators added a whopping 12,457 long futures/options contracts in the week ending 6-7-05 after adding a whopping 15,429 long futures/options contracts in the week ending 5-31-05. The silver Commercial Traders added 9289 short futures/options contracts in the week ending 6-7-05 after adding 14,467 short futures/options contracts in the week ending 5-31-05.
  

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness (massively short) with 10,925 long futures and options contracts versus 28,687 short futures and options contracts as of 6-10-05. A few months ago they were substantially net long, so they've dramatically repositioned themselves for a major decline in the US Dollar, which is great news for precious metals in US Dollar terms.
  

• The Commercial Traders (typically) correctly begin to take substantial profits 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 USD Commercial Traders correctly anticipated USD strength the past three weeks by trading long futures/options positions (5823, 102, 360 long futures/options contracts added), even while they continued to massively short the US Dollar. They added an unusually large (> 10% increase in their short position) 6056 (1196, 2931,7151, 307, 2494 added the prior five weeks and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts in the week ending 6-7-05 which portends volatility with a bias toward weakness in the USD this week (non contrarian indicator). They also made an unusually large addition to their long position last week.

• Gold will probably take out it's early February low near $410 since it 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).
  

• A new indicator is Chaikin Money Flow (CMF) for reliable lead indicator Newmont Mining (NEM). Money flow is a primary fundamental indicator. Notice how NEM CMF turning negative tends to correspond closely with the beginning of sharp downcycles. Please see the 2 year NEM chart below dated 6-10-05. NEM CMF closed at -0.11 for NEM on 6-10-05. Given that a CMF level of -0.25 for NEM reflects strongly negative CMF, then -0.11 is significantly negative CMF.
  

• If a long term upcycle is in effect, it had a very flat start, partly because the long term cycle lows on 5-10-04 occurred well above the very long term upcycle/Bull Market trendlines. The fact that the long term cycle lows on 5-10-04 occurred well above the Bull Market/very long term upcycle trendlines complicated matters. Even if things don't go as expected cycles allow you to figure out what's going on.
  

• Interestingly, at this point the long term upcycle for HUI, NEM, and the XAU is similar to the previous ones (see the HUI 5 year chart). The cycle timeframes are getting longer however. The prior two long term cycles in this gold/silver stock Bull Market (since late 2000) had lower major (intermediate term cycle) highs after long term cycle highs that were followed shortly thereafter by the parabolic/sharply rising segment of the long term upcycle (the long term cycles have been getting longer, see the HUI 5 year chart). The trend of longer long term cycles means that major corrections will tend to be longer also.
  

• The negative correlation between gold and the USD is not as high as the correlation coefficient makes it seem, since it's the square root of the strength of the correlation. It's -72% on 6-10 (-75% on 6-3) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -16% on 6-10 (-30% on 6-3) for the past 180 days. Silver's negative correlation is much less than gold's because it's more of an industrial metal than gold is, hence it has a more positive correlation with US economic strength and a strong US Dollar. 

• The positive correlation between gold and the S & P 500 is 35% for the past 180 days (positive correlation with silver is only 11%), according to Moore Research Center, Inc. This means that the S & P 500 determines 12.25% of gold's price action/variability (Coefficient of Determination = 35% squared = 12.25%). The S & P 500's sharp decline from early March until late April is a major reason why gold and gold stocks were weak during that stretch (positive correlation between gold and the S & P 500 for the past 180 days was at 60% 4 weeks ago). The next bullet discusses the Coefficient of Determination.
  

• The Coefficient of Determination is the square of correlation 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 51.84% (-72% times -72% = 51.84%) of gold's price action/variability now since the USD's negative correlation with gold is -75% as of 6-3-05. The USD determines only 2.56% of silver's price action/variability since the USD's negative correlation with silver is -16% as of 6-10-05. 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 Gold:XAU Ratio (currently at 4.82) may become a third major buy signal criterion, along with 5% follow through and a clearly bullish 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 might be a better criterion.
  

• The remainder of the charts can be found at the bottom. The very long term upcycle trendlines are now relatively flat rather than parabolic (with a segment having turned up), but the major buy/sell signals shown still apply. The last HUI chart below shows the major cycle highs/lows in this gold/silver stock Bull Market, but the very long term upcycle trendline is now flat rather than parabolic, or at least much flatter than it was, so the very long term upcycle trendline in that chart is now wrong (the last segment is wrong).
  

• The report I received via e mail from Marketocracy for the week ending 6-10-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $9.51 on 6-10 vs $9.38 on 6-3, Compliant: Yes, This past week Return: +1.42%." HUI (AMEX Gold Bugs Index) was up +0.84% last week for comparison, so JFR outperformed HUI in 11 of the past 21 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 down 4.90% since it's inception on 1-5-05.
  

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) regularly, so near critical times especially, you may want to check it out. Also, you can see how I use the indicators in concert with cycles just above the "Current Assessment." Fascinating!
  

• XAU Implied Volatility fell -1.81% to 25.525 on Friday 6-10 from 25.995 on 6-9 versus a +3.71% rise in the XAU on 6-10, which is a significant (0.50-1.99%) 1.90% rise in fear (-1.81% + +3.71% = +1.90%. The XAU wall of worry grew by +1.90%, therefore fear rose by 1.90%) that portends strength/an uptrend on Monday 6-13 (fear is usually contrarian and therefore normally portends strength, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That strength/uptrend could follow a gap down at the open and early weakness. XAU Implied Volatility tends to indicate a trend/tone rather than necessarily up or down for that session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. 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 0.87064 for the June expiration on 6-10 versus at 0.80155 for the June expiration on 6-3 versus at 0.80161 (June expiration) on 5-27 versus at 0.55895 (May expiration) on 5-19 versus at 1.13583 (May expiration) on 4-22 versus at 0.48700 for the final April expiration on 4-15 versus 1.04250 for the final March expiration on 3-18 versus 0.94130 for the final February expiration on 2-18. 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 -0.39% (underperformed the XAU the prior three weeks by -0.72%, -0.69% and -1.87%, outperformed the prior week by +0.45%, underperformed the prior two weeks by -2.15% and -1.17%, outperformed the five prior weeks by +0.10%, +1.83%, +0.08%, +0.44% and +0.97%): +3.26% vs +3.71% on 6-10, +0.33% vs +0.19% on 6-9, -0.35% vs -0.27% on 6-8, -1.94% vs -1.95% on 6-7, -1.16% vs -1.15% on 6-6. NEM underperformed the XAU the week before last by -0.72%: +1.06% vs +0.92% on 6-3, -0.29% vs -0.71% on 6-2, +1.40% vs +1.97% on 6-1, -0.93% vs -0.22% on 5-31. NEM underperformed the XAU three weeks ago by -0.69%: +3.27% vs +3.72% on 5-27, -0.52% vs -1.03% on 5-26, -0.22% vs +0.30% on 5-25, +2.40% vs +2.47% on 5-24, +1.36% vs +1.52% on 5-23. NEM underperformed the XAU four weeks ago by -1.87%: -1.56% vs -1.19% on 5-20, -0.31% vs -0.62% on 5-19, +1.66% vs +2.06% on 5-18, +1.17% vs +2.31% on 5-17, -0.60% vs -0.33% on 5-16. NEM outperformed the XAU five weeks ago by +0.45%: -2.16% vs -1.67% on 5-13, -2.93% vs -3.64% on 5-12, -0.93% vs -0.96% on 5-11, -1.99% vs -2.08% on 5-10, +0.45% vs +0.34% on 5-9. NEM underperformed the XAU six weeks ago by -2.15%: -0.91% vs -0.25% on 5-6, -1.00% vs -0.46% on 5-5, +1.94% vs +2.02% on 5-4, +1.06% vs +1.10% on 5-3, -0.66% vs +0.17% on 5-2. NEM underperformed the XAU seven weeks ago by -1.17%: +3.10% vs +1.68% on 4-29, -2.31% vs -1.70% on 4-28, -6.34% vs -4.02% on 4-27, -1.64% vs -1.73% on 4-26, +0.47% vs +0.22% on 4-25. NEM outperformed the XAU eight weeks ago by +0.10%: -0.10% vs -0.69% on 4-22, -1.09% vs -1.09% on 4-21, -1.51% vs -0.91% on 4-20, +2.45% vs +3.14% on 4-19, +2.72% vs +1.92% on 4-18. NEM outperformed the XAU nine weeks ago by +1.83%: -1.09% vs -0.91% on 4-15, -2.97% vs -3.27% on 4-14, -0.89% vs -1.99% on 4-13, -0.10% vs -0.47% on 4-12, -0.31% vs -0.55% on 4-11. NEM outperformed the XAU ten weeks ago by +0.08%: -0.57% vs -0.35% on 4-8, +0.14% vs -0.28% on 4-7, +0.93% vs +0.75% on 4-6, -0.12% vs +0.35% on 4-5, -1.48% vs -1.65% on 4-4. NEM outperformed the XAU 11 weeks ago by +0.44%: +0.47% vs +0.30% on 4-1, -0.38% vs +0.54% on 3-31, +2.24% vs +1.43% on 3-30, -0.53% vs -0.72% on 3-29, -0.22% vs -0.41% on 3-28. NEM outperformed the XAU in the holiday shortened week 12 weeks ago by +0.97%: -0.17% vs -1.01% on 3-24, -1.99% vs -1.94% on 3-23, -1.86% vs -2.06% on 3-22, -2.77% vs -2.75% on 3-21.         

• There's an early warning system in place! When NEM underperforms HUI/the XAU for a few months then the long term upcycle that began on 5-10-04 will probably be in trouble, as was the case during the last few months of the prior long term upcycle that ended on December 2, 2003 (HUI/NEM)/January 6, 2004 (the XAU) (began on July 26, 2002). 
  

• The reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness with only 86,596 long futures and options contracts versus 157,183 short futures and options contracts (data as of 6-7-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 114,070 long futures and options contracts versus only 73,481 short futures and options contracts (data as of 6-7-05).

• The gold Commercial Traders sold a large 6390 (23,530 sold the prior week, 11,214, 860, 11,417, 9363 added the prior four weeks) long futures and options contracts and added 8457 (37,593, 8497, 29,470, 17,544, 26,014 covered the prior five weeks) 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 charts) and keep in mind that the data is as of 6-7-05, 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 789 (115, 9331, 11,417, 19,091, 22,590 sold the prior five weeks) long futures and options contracts and covered a large 5491 (12,638, 7410, 13,922, 8331, 10,107 added the prior five weeks) 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 charts below). 

• The reliable non contrarian (in terms of their trading activity) silver Commercial Traders are short silver. They are clearly positioned for silver weakness with only 23,214 long futures and options contracts versus 102,016 short futures and options contracts as of 6-7-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 64,999 long futures and options contracts versus only 7347 short futures and options contracts as of 6-7-05.

• The silver Commercial Traders sold an unusually large (> 10% decrease in long contracts) 4750 (4443 sold the prior week, 1363 added the week before, 507, 5858 added the two weeks ending 5-10-05) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 9289 (added 14,467, 2447 the prior two weeks, covered 226 the week ending 5-17-05, and covered 14,841 the week ending 5-3-05) short futures and options contracts which portends strength (non contrarian indicator) this week, because the unusually large degree of long liquidation and short selling is the contrarian case short term for this normally non contrarian indicator. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The silver Speculators (hedge funds and other speculators/traders) added an unusually large (> 10% increase in long contracts) 12,457 (added 15,429, sold 41, added 611, sold 823, and sold 7580 in the prior five weeks) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 2807 (covered 2801, 996, 1239, 2750 the prior four weeks, and added 13,999 the week before) short futures and options contracts which portends strength this week (contrarian indicator), because the unusually large long trade and the unusually large degree of short covering is the non contrarian case short term for this normally contrarian indicator. As discussed previously, last week's similar indication didn't work (silver fell sharply), probably because the Speculators are "going crazy" and getting very greedy. Therefore, weakness in silver may occur again this week. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness (massively short) with 10,925 long futures and options contracts versus 28,687 short futures and options contracts as of 6-7-05. Last week they added an unusually large (> 10% increase in long contracts) 5823 (102 added, 360 added, 2151 sold the prior three weeks, and 616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 6056 (1196, 2931,7151, 307, 2494 added the prior five weeks and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts which portends USD volatility with a bias toward weakness this week (non contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines (see charts).
  

• The notoriously contrarian (in terms of their trading activity) USD Speculators are now incorrectly positioned for US Dollar strength (massively long) with 17,978 long futures and options contracts versus 2022 short futures and options contracts as of 6-7-05. Last week they added 372 (added 924, 1537, 6453, 361, and 1515 in the prior five weeks) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 404 (covered 115, covered 1010, covered 1710, added 662 and 22 the prior five weeks) short futures and options contracts which portends USD strength this week (contrarian indicator), because of the unusually large degree of short covering (non contrarian case short term), however, the total number of short contracts held was very small, so this may not be a reliable indication and may actually portend weakness. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).
  

• 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.
  

• 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 recently (early April), 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). 

• 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).

• 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 t