Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 7-3-05

Growth Stock (NASDAQ) Timeliness - Monday - Untimely (Weakness/a downtrend, that could follow a gap up at the open, during "much" of Tuesday's session is a "hit!.")
                                                           - Very Short Term (2-3 Days) - Timely but Risky (NDX/QQQ are in short term downcycles, but a cycle low appears imminent and NDX is extremely oversold.)
                                                           - Short Term (1-3 Weeks) - Timely but Risky (NDX short intermediate term downcycle is in place and VXN (NDX implied volatility index/wall of worry) fell dramatically recently, but a cycle low appears imminent and NDX is extremely oversold.)

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.

For those of you who entered this page directly and haven't discovered the vast resources on the home page yet please check out Joe F. Rocks! Growth Stock Investor & Market Strategist, don't forget to bookmark it and please tell your colleagues and friends.

Analysis/Commentary -

The NASDAQ Composite (COMPX) opened slightly higher on Friday 7-1, but, COMPX trended lower most of the session, spent much of the session in negative territory, and closed slightly higher at 2057.37, +0.41 (+0.02%).

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

"Eerie Nikkei-SPX Parallels" (At Zeal) shows the high degree of correlation between the S & P 500's and NASDAQ's post bubble behavior and that of the Japanese stock market that experienced a bubble in 1989 and remains at much lower levels 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 89 weeks ago to negative/outflows correctly portended a trend change. Given last week's positive NASDAQ Institutional Money Flow, some strength is indicated this week, but cycle channels/trendlines are the primary market timing consideration.

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 89 weeks. A major intermediate term cycle buy signal is in effect for NDX and a short intermediate term downcycle is in place.

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) strength this week ending 7-8 (a short intermediate term downcycle is/may still be in place as of 7-1-05, which is the most important consideration, but a cycle low may be imminent) with 1.10% (207) more uptick blocks during the week ending 7-1. 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 89 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 mixed on Friday 7-1 with NASDAQ A/D at 16:13 in favor of advancing issues but NASDAQ Up/Down Volume was in favor of down volume by nearly 7:5.

The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and QQV (QQQ Volatility Index)) shrank on Friday 7-1 with VXN revealing that a significant (0.50-1.99%) rise in complacency occurred for NDX (NASDAQ 100) and QQV revealed that a sharp (2%-2.99%) rise in complacency occurred for QQQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed Untimely on Tuesday, but it's extremely oversold and a short term as well as a short intermediate term cycle low appear imminent. A short term downcycle was in place at Friday 7-1's close that may lead to weakness/a downtrend if it remains in place. Better than expected economic data may result in strength.

Williams %R for NDX is in extremely oversold territory at -98.70 on 7-1-05 (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 six weeks ago (see the first chart in the group above). NDX is in a short intermediate term downcycle, but a cycle low may be imminent. MACD is on a sell signal (below it's moving average). RSI and Stochastics are on sell signals in or near oversold territory.  

A significant rise in complacency occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) falling -0.19 (-1.31%) to 14.27 while NDX (NASDAQ 100) fell -2.99 (-0.20%) to 1490.53 which reveals that a significant (0.50-1.99%) rise in complacency occurred for NDX because VXN fell significantly despite NDX falling slightly (NDX wall of worry shrank) which portends weakness in NDX on Tuesday, and, a short term downcycle was in place at session's end on Friday 7-1, but a cycle low appears imminent and NDX is extremely oversold. 

A sharp (2-2.99%) (-0.15% decline in QQQQ + -2.18% decline in QQV = -2.33% which is a 2.33% rise in complacency) 2.33% rise in complacency occurred for QQQQ (NASDAQ 100 Tracking Stock, -0.055 (-0.15%) to 36.725) on Friday since QQQQ fell slightly versus QQV falling sharply (QQQ Volatility Index, -0.29 (-2.18%) to 13.04) (QQQQ wall of worry shrank) which portends weakness in QQQQ on Tuesday, and, a short term downcycle was in place at session's end on Friday 7-1, but a cycle low appears imminent and NDX is extremely oversold. 

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 -0.64 (-5.32%) to 11.40 versus a rise in SPX of +3.11 (+0.26%) to 1194.44 which was a very sharp (3-6%) rise in complacency (wall of worry shrank substantially) for the S & P 500/value stocks (SPX is about 75% value stocks) since VIX fell much more than SPX rose (S & P 500) which portends weakness in SPX on Tuesday, and, a short term downcycle was in place at session's end on Friday 7-1, but a cycle low appears imminent and SPX is oversold. 

The S & P 500 (SPX) is deemed Untimely on Tuesday. A short term downcycle was in place at Friday 7-1's close which may lead to weakness/a downtrend on Tuesday if it remains in place. Better than expected economic data may result in some strength. MACD is on a sell signal (below it's moving average). Stochastics and RSI are on sell signals. Williams %R for SPX is in oversold territory at -80.38 on 7-1-05 (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 high (at or above 0.90 but below 1.05) level of 1.00 at Friday's close points to weakness on Tuesday (the CBOE Index Put/Call Ratio at an extremely high 2.10 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 June 28, 2005), the Speculators (hedge funds and other speculators/traders) sold an unusually large (> 10% decrease in long position) 1572 long futures contracts and added bordering on an unusually large (> 10% increase in short position) 688 short futures contracts which portends weakness this week (contrarian indicator), because the unusually large degree of short selling and long liquidation is the non contrarian case short term, whereas the Commercial Traders added an unusually large (> 10% increase in long position) 3948 long futures contracts and added an unusually large (> 10% increase in short position) 3497 short futures contracts which portends volatility with a bias toward strength this week (non contrarian indicator), because they traded net long by 451 futures contracts. 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.) @ 45.9% bullish last week from 46.6% the prior week is a neutral factor for the prospects of stocks during the week ending 7-8-05 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 significant decline last week is a negative factor for the prospects of stocks during the week ending 7-8-05 because it's a significant 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, and XAU New Monthly Upcycles Appear To Have Begun

• Monthly cycle 2% follow through buy signals occurred on June 29 for HUI and the XAU (see 3 month charts). HUI probably bottomed on June 28, putting in point C of an Elliot Wave A, B, C correction (monthly cycle low, see latest 3 month chart). NEM may have put in point C on Friday July 1 (see latest 3 month chart). The XAU probably bottomed on June 21 (see latest 3 month chart), but an Elliot Wave A, B, C correction did not occur.
  

• Despite a US Dollar spike of +1.11 on Friday 7-1 that sent gold sharply lower and the fact that NEM continued to underperform the XAU by a wide margin for the seventh consecutive session, gold/silver stocks managed to close with gains for the week (HUI was up +1.44% last week) and on Friday July 1 (HUI up +0.25%). Gold/silver stocks appear to be leading the metals to the upside with HUI, NEM, and the XAU closing near session highs on Friday July 1, whereas gold closed near it's session low. The fact that gold/silver stocks managed to rebound dramatically from two very sharp short term downcycles last week (NEM fell 4.69% from June 30's session high at 39.86 to July 1's session low of 37.99) in the face of substantial US Dollar strength and with NEM underperforming the XAU by a wide margin is a great sign. HUI, NEM, and the XAU's two very sharp volatility spikes/plunges last week (one occurred early and one occurred late in the week) portends substantial strength, assuming 1 monthish cycle lows have occurred (HUI's on June 28, NEM's on July 1, and the XAU's on June 21).
  

• Looking at the latest 3 month charts for HUI, NEM, and the XAU they all hit their major intermediate term upcycle trendlines (in place since May 16, 2005) on Friday July 1 and bounced dramatically, with NEM doing so on very respectable volume of over 4 million shares, given that many traders were off for the Fourth of July holiday weekend in the US and I think the Canadian market was closed. HUI, NEM, and the XAU all appear to have put in 1 monthish cycle lows recently (HUI on June 28, NEM on July 1, the XAU on June 21), but NEM's dramatic underperformance the past 7 sessions would normally be a big dark cloud (at any other cycle phase than the parabolic phase of a long term upcycle), but it probably makes sense. Part of NEM's underperformance stems from the fact that it's the largest market cap gold stock and therefore tends to be less volatile than most gold/silver stocks. So, it'll tend to underperform the XAU by a wide margin in this parabolic/sharply rising segment of the long term upcycle that began May 10, 2004. NEM's dramatic underperformance versus the XAU the past 7 sessions correctly portended dramatic weakness at times last week (two dramatic plunges occurred).
  

• The latest 3 month charts for HUI, NEM, and the XAU show the very flat long term upcycle trendline until May 16, 2005 (began May 10, 2004), and, that it probably turned up dramatically after May 16, 2005. The XAU long term upcycle parabolic/sharply rising segment's rate of ascent is steeper than NEM's (see latest 3 month charts), which accounts for NEM underperforming by a wide margin recently. So, NEM's dramatic underperformance versus the XAU recently is probably a reflection of the fact that HUI, NEM, and the XAU are in the parabolic/sharply rising segment of the long term upcycle that began on May 10, 2004, which is obviously a major positive if true.
  

• The very bearish NEM Lead Indicator indicates that a test of the May 16, 2005 major intermediate term cycle lows can't be ruled out however. Even though this should be the parabolic/sharply rising segment of the long term upcycle that began on May 10, 2004, who's to say that it doesn't start out very flat and then go parabolic? The parabolic/sharply rising segment of the previous long term upcycle lasted about 9 months, from March 2003 until the December 2, 2003 (HUI/NEM)/January 6, 2004 (XAU) long term cycle highs. Given that the long term cycles (since the gold/silver stock Bull Market began in late 2000) have been getting progressively longer and substantially so (see HUI chart dated 5-12-05 below), this parabolic phase may last about a year, which means the major intermediate term upcycle since May 16, 2005 is still in it's early stage. 

• So, the fact that cycles tend to begin relatively flat, combined with the very bearish NEM Lead Indicator, indicates that a retest of the likely major cycle lows on May 16, 2005 has to be considered a potential scenario. In the next week or two we should know whether the very bearish NEM Lead Indicator is presaging a decline toward and potential retest of the likely major intermediate term cycle lows that occurred on May 16, 2005. Given the impressive resiliency of gold/silver stocks last week in the face of a strong USD it appears that HUI, NEM, and the XAU entered the parabolic/sharply rising segment of the long term upcycle (began on May 10, 2004) on May 16, 2005. NEM's dramatic underperformance versus the XAU recently makes sense in the parabolic/sharply rising segment of a long term upcycle as discussed earlier.
  

• There was a 1 monthish cycle from May 16 until June 28 for HUI, until July 1 (if point C occurred) for NEM, and until June 21 for the XAU, with Elliot Wave 1, 2, 3, 4, 5 upcycles and A, B, C corrections/downcycles for HUI and NEM, but not for the XAU. See the 3 month charts below, with HUI's chart showing the Elliot Wave points.
  

• Gaps should be used in concert with cycle channels/trendlines (all tools and indicators should be used in concert with cycle channels/trendlines). NEM recently filled it's upside gap to 40.25 from May 2005, putting in a 1 monthish cycle high at 40.34 on June 23, then corrected, possibly putting in a 1 monthish cycle low (Elliot Wave point C) at 37.99 on 7-1-05. Upside gaps to keep in mind are the XAU's gap at 95.78 and it's big gap at 100.55, both from March 2005. So, the XAU's big gap at 100.55 is important. Once it gets filled, a correction is likely to occur as happened after NEM's big gap to 40.25 was filled. Those points are the points at which the gaps would be filled. If the XAU rises to 95.78 then that upside gap from March 2005 would be filled for example.
  

• The silver COT data is bullish for the second straight week, with the reliable non contrarian silver Commercial Traders adding significantly to their long position and engaged in significant short covering, whereas, the gold Commercial Traders continued to massively short gold last week and reduce their long position. All the details are toward the bottom of this update. A gold/silver COT dichotomy has existed the past two weeks. Gold hit a 1 month cycle 2% follow through sell signal last week (see latest chart), but a cycle low may be imminent.

• Another important fact is that the USD Commercial Traders continue to massively short the USD (added a large 2056 (added 804 the prior week, covered 6482 the prior week, 6056, 1196, 2931,7151, 307, 2494 added the prior six weeks and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts in the week ending 6-28-05), while also trading significant short term long positions during much of the USD's dramatic rally. Last week ending 6-28-05 they added 60 (added 752 the prior week, sold 7545 the prior week, added 5823, 102 added, 360 added, 2151 sold the prior four weeks, and 616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts. Friday July 1's USD spike move should soon correct and send gold higher.
  

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness (massively short) with 4192 long futures and options contracts versus 25,065 short futures and options contracts as of 7-1-05. 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 USD's major intermediate term upcycle since late December 2004 remains intact. Please see the six month USD chart below. When dramatic spike moves break down they tend to fall hard and fast. The more dramatic the spike move the more dramatic the breakdown tends to be.
  

• I recently added Elliot Wave (or Wavesque, call it what you will) to my arsenal because it appears to be highly useful based on the prior two major upcycles and the 1 monthish upcycle that began on May 16, 2005 and recently ended (new monthly upcycles appear to have begun as previously discussed). I'm not that knowledgeable about Elliot Wave Theory, but the important thing to me is to look for recurring patterns, whether they fit Elliot Wave Theory or not. Looking at the 2 year XAU chart dated 5-16-05 below the prior 2 major cycles followed an Elliot Wavesque pattern, but, according to what a reader told me, the pattern doesn't fit Elliot Wave Theory because waves 1 and 3 shouldn't overlap. My feeling is "who cares," it's a recurring pattern that looks Elliot Wavesque. 

• The important thing is the recurring pattern not whether it fits Elliot Wave Theory per se. Elliot was a retired accountant who spent several years creating his theory. He did a lot of great research/work. That doesn't mean his work was 100% complete, 100% accurate or 100% useful. I feel that saying wave 1 shouldn't overlap wave 3 (if that's what he said for all cases) is a mistake. HUI's did last year in it's intermediate term upcycle from 5-10-04 until 11-17-04 where it rose 51.50% (they overlapped in the previous major upcycle also where huge gains occurred). What's the problem? You have to live in the real world and think for yourself. Street smarts, thinking for yourself, and pattern recognition are very important in the investing/trading world.
  

• The sharp declines late last week by HUI, NEM, and the XAU were a predictable correction to the spike move on 6-29, and, since cycles tend to begin relatively flat, a sharp decline was to be expected. 

• The 5 year HUI chart dated 6-29-05 below (first chart) illustrates my "Trade the Cycles" system and the cycle parabolic trendline buy/sell signals can be used for any cycle timeframe. The NEM Lead Indicator is also used for major buy signals and there are numerous confidence factors previously discussed such as a likely Elliot Wave A, B, C correction pattern (see XAU 2 year chart dated 5-16-05 below). It also obviously illustrates the big picture, which is a very long term upcycle since late 2000 and a long term upcycle since May 10, 2004 for gold/silver stocks. The fact that the long term cycle patterns occurred 3 times so far in this gold/silver stock Bull Market indicates there's only a 12.50% chance it was the result of pure luck (50% raised to the third power), which also means there's about an 87.50% chance that this is in fact a long term upcycle and a dramatically higher long term cycle high than the previous one will occur. One must also know that very long term upcycles last about 17.2 years on average. In the 5 year HUI chart dated 6-29-05 note the dramatic spikes that occur when each of the previous 3 long term cycle highs occurred.
  

• There are also clearly short/minor and long/major intermediate term cycles and short term cycles as well. The XAU 2 year chart dated 5-16-05 below 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.
  

• Cycles are the most important consideration when timing any market. There's been a major intermediate term upcycle since May 16, 2005 for HUI, NEM, and the XAU (see latest 3 month charts and the HUI chart dated 6-3-05 shows the 5% follow through major buy signal requirement being satisfied, which is one of two major buy signal requirements), a long term upcycle since May 10, 2004 for HUI, NEM, and the XAU (see NEM 2 year chart dated 6-17-05), and a very long term upcycle since late 2000 for HUI, NEM, and the XAU (see HUI 5 year chart dated 6-29-05 and XAU 5 year chart dated 5-12-05).
  

• Gold hit a major intermediate term cycle buy signal (see 1 year chart below) recently 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).

• "Trade the Cycles" indicates that HUI, NEM, and the XAU are now on a major intermediate term cycle buy signal (see HUI chart dated 6-3-05). Gold/silver stocks are in a very long term upcycle/true Bull Market since October/November 2000 (see 5 year chart for the XAU below) and are in a long term upcycle since May 10, 2004 (see NEM 2 year chart dated 6-17-05 below). Gold began a very long term upcycle/true Bull Market in April 2001 and silver did so in late 2001.

•  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.

• 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).
  

• 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 despite a substantial rally which indicated that many doubted the low was 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. The higher short intermediate term cycle low on June 9 (about a one month low) probably confirms that May 16 is a major bottom (a rising bottoms long intermediate term upcycle trendline is in place).
  

• Williams %R is below overbought territory (above -20) for HUI (-23.30)/NEM (-53.00)/XAU (-22.70) on 7-1-05. If it hits an extremely overbought level near 0 that's a reliable indication to look to take profits, which doesn't mean you mechanically sell, but that you probably will sell very soon or you may start selling (sell in 2 or 3 stages).

• 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).
  

• 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 3 month NEM chart below dated 7-1-05. NEM CMF closed at -0.07 for NEM on 7-1-05. Given that a CMF level of -0.25 for NEM reflects strongly negative CMF, then -0.07 is significantly negative CMF.
  

• 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 dated 5-12-05). 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 -54% on 7-1 (-59% on 6-24) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is -1% on 7-1 (+3% on 6-24) for the past 180 days. Silver's correlation is much more positive 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 22% for the past 180 days (negative correlation with silver is -1%), according to Moore Research Center, Inc. This means that the S & P 500 determines 4.84% of gold's price action/variability (Coefficient of Determination = 22% squared = 4.84%). 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% 7 weeks ago). The next bullet discusses the Coefficient of Determination.
  

• 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 29.16% (-54% times -54% = 29.16%) of gold's price action/variability now since the USD's negative correlation with gold is -54% as of 7-1-05. The USD determines only 0.01% of silver's price action/variability since the USD's negative correlation with silver is -1% as of 7-1-05. 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 4.58) 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 report I received via e mail from Marketocracy for the week ending 7-1-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $9.83 on 7-1 vs $9.69 on 6-24, Compliant: Yes, This past week Return: +1.45%." HUI (AMEX Gold Bugs Index) was up +1.436% last week for comparison, so JFR outperformed HUI in 12 of the past 24 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 1.70% 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 -1.41% to 24.860 on Friday 7-1 from 25.215 on 6-30 versus a +0.40% rise in the XAU on 7-1, which is a significant (0.50-1.99%) 1.01% rise in complacency (-1.41% + +0.40% = -1.01%. The XAU wall of worry shrank by -1.01%, therefore complacency rose by 1.01%) that portends weakness/a downtrend on Tuesday 7-5 (complacency is usually contrarian and therefore normally portends weakness, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That weakness/downtrend could follow a gap up at the open and early strength. 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 0.81863 for the July expiration on 7-1 versus at 0.91027 for the July expiration on 6-24 versus at 0.93135 for the July expiration on 6-17 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 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 -2.86% (underperformed the XAU the week before last by -0.38%, outperformed the XAU the prior week by +0.09%, underperformed the XAU the prior four weeks by -0.39%, -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%):                                                         -0.26% vs +0.40% on 7-1, -1.76% vs -1.63% on 6-30, +2.87% vs +3.79% on 6-29, -1.18% vs -0.62% on 6-28, -1.59% vs -1.00% on 6-27. NEM underperformed the XAU the week before last by -0.38%: +0.51% vs +0.88% on 6-24, +0.05% vs +0.54% on 6-23, -0.08% vs -0.52% on 6-22, +0.46% vs +0.43% on 6-21, -1.63% vs -1.64% on 6-20. NEM outperformed the XAU three weeks ago by +0.09%: +0.68% vs +0.55% on 6-17, +3.46% vs +3.34% on 6-16, +0.81% vs +1.58% on 6-15, -1.17% vs -1.49% on 6-14, +1.21% vs +0.92% on 6-13. NEM underperformed four weeks ago by -0.39%: +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 five weeks ago 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 six 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 seven 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 eight 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 nine 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 10 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 11 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 12 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 13 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 14 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 15 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 69,972 long futures and options contracts versus 248,529 short futures and options contracts (data as of 6-28-05).
  

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 185,159 long futures and options contracts versus only 44,627 short futures and options contracts (data as of 6-28-05).

• The gold Commercial Traders sold 3918 (8544, 4162, 639, 23,530 sold the prior four weeks, 11,214, 860, 11,417, 9363 added the prior four weeks) long futures and options contracts and added bordering on an unusually large (> 10% increase in short contracts) 21,234 (added 52,221, 17,891, 8457 the prior three weeks, covered 37,593, 8497, 29,470, 17,544, 26,014 the prior five weeks) short futures and options contracts which portends strength this week (non contrarian indicator), because the unusually large degree of short selling is the contrarian case short term. 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 6-28-05, 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 bordering on an unusually large (> 10% increase in long contracts) 15,962 (added 45,482, 9645, 789 the prior three weeks, sold 115, 9331, 11,417, 19,091, 22,590 the prior five weeks) long futures and options contracts and covered an unusually large (> 10% decrease in short contracts) 9456 (covered 10,743, 8655, 5491 the prior three weeks, added 12,638, 7410, 13,922, 8331, 10,107 the prior five weeks) 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. 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 with only 29,691 long futures and options contracts versus 101,057 short futures and options contracts as of 6-28-05.

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 54,258 long futures and options contracts versus only 6624 short futures and options contracts as of 6-28-05.

• The silver Commercial Traders sold 2 (added 515, 5964 the prior two weeks, 4750, 4443 sold the prior two weeks, 1363 added the week before, 507, 5858 added the two weeks ending 5-10-05) long futures and options contracts and covered 3899 (covered 475 the prior week, added 3414, 9289, 14,467, 2447 the prior four 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. The most important consideration in timing any market is the cycle channels/trendlines.

• The silver Speculators (hedge funds and other speculators/traders) sold a large 3328 (sold 2231, 5182 the prior two weeks, added 12,457, 15,429 the prior two weeks, sold 41, added 611, sold 823, and sold 7580 in the prior five weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 951 (added 43 the prior week, covered 1716, 2807, 2801, 996, 1239, 2750 the prior six weeks, and added 13,999 the week before) short futures and options contracts which portends weakness this week (contrarian indicator), because the unusually large degree of short selling is the non contrarian case short term, but the small total short position of 6624 futures and options contracts makes the indication suspect. 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 now correctly positioned for US Dollar weakness (massively short) with 4192 long futures and options contracts versus 25,065 short futures and options contracts as of 6-28-05. Last week they added 60 (added 752 the prior week, sold 7545 the prior week, added 5823, 102 added, 360 added, 2151 sold the prior four weeks, and 616, 403, 1728, 2192, 4322, 3274 sold the six weeks ending 4-19-05) long futures and options contracts and added a large 2056 (added 804 the prior week, covered 6482 the prior week, 6056, 1196, 2931,7151, 307, 2494 added the prior six weeks and 770, 2662, 2421, 1576 added the four weeks ending 4-12-05) short futures and options contracts which portends weakness this week (non contrarian indicator), but the bordering on unusually large short trade points to some strength (contrarian case short term). 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 now incorrectly positioned for US Dollar strength (massively long) with 21,581 long futures and options contracts versus 2302 short futures and options contracts as of 6-28-05. Last week they added an unusually large (> 10% increase in long contracts) 2655 (sold 543 the prior week, added 1490, 372, 924, 1537, 6453, 361, and 1515 in the prior seven weeks) long futures and options contracts and added an unusually large (> 10% increase in short contracts) 432 (covered 766, added 614, covered 404, covered 115, covered 1010, covered 1710, added 662 and 22 the prior eight weeks) short futures and options contracts which portends USD strength this week (contrarian indicator), because of the unusually large long trade (non contrarian case short term). The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

• 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 g