Joe F. Rocks!
Growth Stock Investor & Market Strategist

Joe F. Rocks! Trade the Cycles Updated 8-28-05

Growth Stock (NASDAQ) Timeliness - Monday - Untimely (Weakness/a downtrend, that could follow a gap up at the open, during "much" of Monday's session is a "hit!.")
                                                           - Very Short Term (2-3 Days) - Untimely or Risky (NDX/QQQ may still be in minor intermediate term downcycles.)
                                                           - Short Term (1-3 Weeks) - Timely (NDX minor intermediate term downcycle should soon turn up.)

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 8-26, but, COMPX trended lower much of the session, spent the entire session in negative territory, and closed significantly lower at 2120.77, -13.60 (-0.64%).

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 97 weeks ago to negative/outflows correctly portended a trend change. Given last week's negative NASDAQ Institutional Money Flow, some weakness is indicated this week, but cycle channels/trendlines are the primary market timing consideration. A minor intermediate term downcycle may still be in place (see first chart below).

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 97 weeks (see second chart below). A major intermediate term cycle buy signal is in effect for NDX (and SPX) and a minor intermediate term downcycle may still be in place for NDX (2% follow through sell signal occurred) and SPX.

NASDAQ Institutional Money Flow (block trading data, 10,000+ share blocks) "portends" (this isn't a good one week look ahead indicator except when there's a well established multiweek trend and the minor intermediate term cycle agrees with it) weakness this week ending 9-2 (a minor intermediate term downcycle is in place as of 8-26-05, which is the most important consideration) with 0.61% (110) more downtick blocks during the week ending 8-26. 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 97 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 8-26 with NASDAQ A/D at nearly 20:9 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)) was a mixed picture on Friday 8-26 with VXN revealing that a modest rise in complacency occurred for NDX (NASDAQ 100) but QQV revealed that a significant rise in fear occurred for QQQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed Untimely on Monday. A short term downcycle is in place at Friday 8-26's close that would lead to weakness/a downtrend, and a minor intermediate term downcycle may still be in place (see top chart and second chart from the top dated 8-12-05 in the group above). Better than expected economic data may result in strength.

Williams %R for NDX is in oversold territory at -89.16 on 8-26-05 (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, see the second chart from the top in the group above). NDX is in a minor intermediate term downcycle. MACD is on a sell signal (below it's moving average). RSI and Stochastics are on sell signals in or near oversold territory. 

A modest rise in complacency occurred for the NASDAQ 100 on Friday with VXN (NASDAQ 100 Volatility Index) rising +0.02 (+0.13%) to 15.37 while NDX (NASDAQ 100) fell -7.04 (-0.45%) to 1558.84 which reveals that a modest (0.25-0.49%) rise in complacency occurred for NDX because VXN rose slightly while NDX fell modestly (NDX wall of worry shrank) which portends weakness in NDX on Monday, and, a short term downcycle is in place at session's end on Friday 8-26. 

A significant (0.50-1.99%) (-0.33% decline in QQQQ + +1.11% rise in QQV = +0.78% which is a 0.78% rise in fear) 0.78% rise in fear occurred for QQQQ (NASDAQ 100 Tracking Stock, -0.13 (-0.33%) to 38.46) on Friday since QQQQ fell modestly while QQV rose significantly (QQQ Volatility Index, +0.15 (+1.11%) to 13.65) (QQQQ wall of worry grew) which portends strength in QQQQ on Monday, but, a short term downcycle is in place at session's end on Friday 8-26. 

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 -0.01 (-0.07%) to 13.72 versus a rise in SPX of -7.27 (-0.60%) to 1205.10 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 slightly while SPX fell significantly (S & P 500) which portends weakness in SPX on Monday, and, a short term downcycle is in place at session's end on Friday 8-26, and the minor intermediate term cycle may still be heading down (2% follow through sell signal occurred). 

The S & P 500 (SPX) is deemed Untimely on Monday. A short term downcycle is in place at Friday 8-26's close which may lead to weakness/a downtrend on Monday if it remains in place. Better than expected economic data may result in some strength. MACD is on a sell signal (below it's moving average). Stochastics and RSI are on sell signals in oversold territory. Williams %R for SPX is in extremely oversold territory at -97.61 on 8-26-05 (below -80 (near the bottom) on my chart is the (look to) "buy" area (oversold) and above -20 is the look to "sell" area (overbought)). SPX is on a major intermediate term cycle buy signal (5% follow through after breaking it's intermediate term downcycle trendline). SPX is in a minor intermediate term downcycle since August  4 or 5 (2% follow through sell signal  occurred). An A, B, C Elliot Wave pattern correction appears to be taking place.

The CBOE Total Put/Call Ratio at an extremely high (at or above 1.05) level of 1.20 at Friday's close points to weakness/volatility (could be followed by strength or could get strength followed by weakness, i.e. volatility is the key word due to the extremely high fear environment) on Monday (the CBOE Index Put/Call Ratio at an extremely high 1.99 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 August 23, 2005), the Speculators (hedge funds and other speculators/traders) sold 936 long futures contracts and added an unusually large (> 10% increase in short position) 2718 short futures contracts which portends weakness this week (contrarian indicator), because the unusually large degree of short selling makes them short term non contrarian, but, the long liquidation points to some strength because they tend to be contrarian, whereas, the Commercial Traders added 1374 long futures contracts and added 45 short futures contracts which portends strength this week (non contrarian indicator). NDX is in a minor intermediate term downcycle as of 8-26-05. Cycle trendlines/channels are the primary market timing consideration. NDX COT (do an edit then find "nasdaq" in Internet Explorer or Netscape to find it because it's near the bottom)

American Association of Individual Investors (AAII) % Bullish (AAII has been a useful non-contrarian sentiment indicator at very low levels below 40% bullish and very high levels above 60% bullish.) @ 36.1% bullish last week from 29.3% the prior week is a negative factor for the prospects of stocks during the week ending 9-2-05 because it's at a very low level of bullishness (below 40%). The change in or delta AAII % bullish is also a useful short term/weekly look ahead indicator in addition to the absolute value of AAII % bullish. The very sharp rise last week is a positive factor for the prospects of stocks during the week ending 9-2-05 because it's a very sharp rise in complacency for this useful non-contrarian sentiment indicator contrarian. For now I'm using delta AAII % Bullish as a non contrarian indicator and I haven't determined exactly what significant changes are versus sharp or very sharp, etc. Since it appears to be strictly non contrarian (so far), I don't have to determine what an unusually large change is where the indicator becomes contrarian. The absolute value does become contrarian at extremely low (0-30% bullish) or extremely high (70-100% bullish) values, at least from an intermediate term cycle standpoint (a few weeks/months).

Gold & Silver Stocks - HUI, NEM, XAU Elliot Wave Patterns and Gap Filling Action       
 

• NEM filled downside gaps on Wednesday August 24 at 39.85 and 39.25, HUI nailed a 38.2% Fibonacci retracement level (from long term cycle low at 163.81 to previous long term cycle high at 258.60), bottoming at 200.05 versus the 200.02 Fibonacci level, and bounced off major support at the old downtrend line since 11-17-04. HUI, NEM, and the XAU have Elliot Wave A, B, C correction patterns (see latest charts).               
  

• "Trade the Cycles" synopsis - HUI, NEM, and the XAU may have hit minor intermediate term cycle lows (one to two month cycle low) on Wednesday August 24 or one is probably imminent. It's likely that they will fill downside gaps early on Monday 8-29 since they closed the week not far above the gaps they created at 8-25's open. Please note that HUI appears to have closed at about 201.50 based on it's intraday chart, not 203.49 that the chart indicates. 203.49 was the session high. Gold's Elliot Wave A, B, C correction is lagging gold stocks as usual. Gold is likely to bottom in the $422 to $424 range, near it's major upcycle trendline since early February (see latest chart), versus a close on 8-26 at $437.70, 10 cents above it's close on 8-19. Gold should put in an Elliot Wave point B cycle high in the near future en route to the ultimate correction minor intermediate term cycle low at point C. The most important market timing consideration, therefore the most important thing to remember, is that HUI, NEM, and the XAU are in the sharply rising phase of the long term upcycles (began on May 10, 2004) since May 16, 2005's major intermediate term cycle lows (see  latest charts), and, this major upcycle should last until about May 2006 based on the fact that the long term cycles have been getting progessively longer (see first chart below and the HUI chart dated 5-12-05). HUI, NEM, and the XAU have been in a true Bull Market/very long term upcycle since October (NEM/XAU)/November (HUI) 2000 (see first chart below and the XAU chart dated 7-12-05). They've been in a long term upcycle since May 10, 2004 (see first chart below and the HUI chart dated August 5). They've been in a major intermediate term upcycle since May 16, 2005 (see charts dated 8-26-05). Gold began a very long term upcycle/true Bull Market in April 2001 and silver did so in late 2001. The cycle channels/trendlines (see charts below) are the primary market timing consideration. In the XAU's latest chart, note the recurring Elliot Wave patterns. HUI and NEM are also trading in Elliot Wave patterns. Also, nearly all if not all gaps seem to be getting filled, so they should be watched closely .
  

• Minor intermediate term upcycle parabolic trendlines (see latest NEM chart) broke down recently, reliably resulting in a substantial correction. This is really the mistake I made in my analysis last week, not having a good awareness of the fact that, since the parabolic trendlines broke down and dramatic spike moves had occurred for HUI, NEM, and the XAU, substantial corrections were therefore likely (larger than had occurred as of 8-18). Look at the charts below and you'll see that virtually every time that a parabolic trendline breaks down a substantial correction occurs. This is very important to keep in mind. Trade "parabolas," which is what I like to call the cycle parabolic trendlines (see latest NEM chart and other charts). Another major problem of course was that HUI and the XAU's major upcycle channels weren't clearly defined yet and ended up being flatter than drawn last week.
  

• The XAU's and especially HUI's major upcycle channels turned out to be flatter than drawn last week. Spikes and inverse spikes (plunges) that occur at or near cycle highs/lows tend to define channels. NEM's major upcycle channel is defined (see latest chart), which is the most important one since NEM is a reliable lead indicator. Last week I expected HUI and the XAU to hit the top of their channels in the near future, but they were in fact closer to the top of those channels than was evident last week, so the correction ended up being greater, but still was relatively average as minor corrections go. The real mistake I made last week was that I failed to realize that a larger correction than had occurred as of 8-18 was very likely because the minor intermediate term upcycle parabolic trendlines had broken down (HUI, NEM, and the XAU). As of 8-18 the correction was unusually shallow and brief. HUI and NEM's correction as of 8-18 had lasted all of two days, while the XAU's lasted four days, and, the declines were a modest -5.53% (HUI), -4.27% (NEM), and -5.28% (XAU) versus the typical 6% to 12% for minor corrections. In the next week or so HUI and the XAU's major upcycle channels should be clearly defined. However, at some point in this major upcycle they should become more sharply rising and will be parabolic shaped as almost all cycles are.
  

• HUI corrected to what is now a major support line (old downtrendline since 11-17-04, see HUI chart dated 8-5-05) since August 3's major breakout (major resistance trendline becomes major support) and also nailed the 38.2% Fibonacci retracement level (200.02 versus (potential) minor intermediate term cycle low at 200.05 on August 24) from the long term cycle low at 163.81 on 5-10-04 to the prior long term cycle high on 12-2-03 at 258.60 (0.382 times (258.60 - 163.81) + 163.81 = 0.382 times 94.79 + 163.81 = 36.21 + 163.81 = 200.02). HUI may have hit a minor intermediate term cycle low (one to two month cycle low) on August 24 within 0.015% of the 38.2% Fibonacci retracement level.

• NEM has a downside gap at 39.05 (created 8-25) that will probably get filled early on Monday 8-29, because NEM closed a mere 13 cents above that gap (at 39.18) on 8-26. NEM outperformed the XAU by +0.28% on Friday 8-26, so after likely early weakness HUI, NEM, and the XAU may rally. HUI and the XAU also closed not far above their downside gaps created at 8-25's open.
  

• The gold COT (Commitments of Traders) data points to weakness accompanied by some strength this week. This week might see gold rally to an Elliot Wave point B cycle high en route to the ultimate correction minor intermediate term cycle low at point C, at or near the major upcycle trendline since early February. So, there could be more strength than weakness this week. The trades the non contrarian gold Commercial Traders made last week were very modest (less than 600 futures and options contracts traded), so the real story are the huge trades made during the prior two weeks. The massive shorting by the non contrarian gold Commercial Traders (48,207 short futures and options contracts added as of 8-16-05 versus 45,387 the prior week) in recent weeks correctly pointed to weakness as did the massive long trades by the contrarian gold Speculators (41,184 long futures and options contracts added as of 8-16-05 versus 48,821 the prior week). The gold Commercial Traders even made a respectable long trade (4653 futures and options contracts) two weeks ago, anticipating some significant strength followed by a resumption of the correction (maybe an Elliot Wave A, B, C type correction pattern), which is what appears to be happening. They're obviously not just hedgers but are very good traders as well, which is why in markets such as gold and silver they're able to maintain a substantial net short position for years (probably make a large profit in the case of most Commercial Trading firms), despite having substantial net short positions. So, it appears that they're able to hedge risk and make a tidy profit in most cases. Gold's major upcycle trendline since early February (see one year chart) is currently at $422, so a decline to the $422 to $424 area from Friday 8-26's close at $437.70 may occur. Gold's dramatic spike move three weeks ago (see one year chart) was a sign that the minor intermediate term upcycle was peaking. A 2% follow through minor intermediate term cycle sell signal occurred for gold the week before last.
  

• The silver COT data points to both weakness and strength this week. The net long trades by the contrarian silver Speculators point to weakness this week, while the silver Commercial Traders COT data is bullish because of the unusually large degree of long liquidation (> 10% decline in long position, they sold 4476 long futures and options contracts) which points to strength (contrarian case short term), as discussed in detail later (toward the bottom of this update), and they also engaged in a large degree of short covering which points to strength.

• The XAU Put/Call Ratio rose substantially last week from 0.89710 (September expiration) on 8-19 to 1.02491 for the September expiration on 8-26, which is a substantial rise in fear (the wall of worry grew substantially) that portends substantial strength following a minor intermediate term cycle low. XAU Implied Volatility points to weakness on Monday 8-29. XAU Implied Volatility fell -1.11% to 24.530 on Friday 8-26 from 24.805 on 8-25 versus a -0.41% decline in the XAU on 8-26, which is a significant (0.50-1.99%) 1.52% rise in complacency (-1.11% + -0.41% = -1.52%. The XAU wall of worry shrank by -1.52%, therefore complacency rose by 1.52%) that portends weakness/a downtrend on Monday 8-29 (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 (or XAU Put/Call Ratio) tends to indicate a trend/tone rather than necessarily a simplistic up or down session. Cycles are the primary market timing consideration.
  

• 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.
  

• Williams %R is in oversold territory (below -80 is oversold) for HUI (-82.20)/NEM (-83.40)/XAU (-88.80) on 8-26-05 (see latest charts). If it hits an oversold level well below -80 (near -100), as occurred last week, that's a reliable indication to look to buy, which doesn't mean you mechanically buy, but that you probably will buy very soon or you may start buying (in 2 or 3 stages). The converse is of course true for overbought levels at or above -20, but the most important consideration by far is cycle channels/trendlines. Indicators and timing tools are used for finetuning buy/sell decisions after cycle trendline buy/sell signals suggest it's time to buy/sell (see charts above, most of you should probably be holding until a long term cycle sell signal occurs in 6 to 12 months).

• HUI, NEM and the XAU have upside gaps created on Wednesday 8-17 at 215.73, 40.85, and 98.79, so short term cycle highs may occur shortly after those gaps get filled. Most of the time if it appears reasonable that a gap will be filled, then it probably will get filled. You should be aware of gaps when making buy/sell decisions.
  

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

• The USD should remain below 88.50 (the likely major intermediate term downcycle trendline that appears to have rolled over last week) if a major intermediate term cycle high has occurred (see 1 year chart above). The USD appears to have put in a major intermediate term cycle high, because it's parabolic uptrendline has broken down (see 1 year chart above). A 5% follow through sell signal is required to confirm that's the case. The dramatic spike also suggests that a major cycle high may have occurred. The US Dollar only determines 22.09% (-47% times -47% = 22.09%) of gold's price action/variability now since the USD's negative correlation coefficient with gold is -47% for the prior 180 trading days as of 8-26-05.
  

• The very sharp volatility spikes that occurred last week portend strength following minor intermediate term cycle lows that may have occurred on 8-24, because very high volatility has a high correlation with fear. HUI fell from 212.54 on 8-22 to 200.05 on 8-24 which was a -5.88% volatility spike in only two sessions.
  

• The fact that NEM has significantly outperformed the XAU since July 14 (after dramatically underperforming for two months, see bottom chart above) is a great sign that portends substantial strength for the foreseeable future.

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

• USGL.OB (US Gold Corp) looks interesting both technically and because this mining firm is now run by ex Goldcorp CEO Rob McEwen. USGL.OB is more than 10% owned by Novagold Resources (NG). It has a downside gap below 1.00 that will probably get filled in the near future. The stock recently peaked at 2.20ish. The stock is already extremely oversold, so it could do an Elliot Wave A, B, C correction en route to filling it's downside gap. You have to perform your own due diligence, I'm not in the business of recommending stocks, but this one is worth looking at is what I'm saying.
  

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

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

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

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

• I update my gold/silver stock "Current Assessment" near the top of my home page (middle of the second bullet) 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!
  

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

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

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

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

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

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

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

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

• A new indicator is Chaikin Money Flow (CMF) for reliable lead indicator Newmont Mining (NEM). Money flow is a primary fundamental indicator. NEM CMF turning negative tends to correspond closely with the beginning of sharp downcycles. Please see the NEM chart above dated 8-26-05. NEM's CMF closed at -0.18 on 8-26-05. Given that a CMF level of -0.25 for NEM reflects strongly negative CMF, then -0.18 is significantly negative CMF.
  

• 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. The correlation coefficient is -47% on 8-26 (-53% on 8-19) for the past 180 trading days for gold, according to Moore Research Center, Inc. For silver the positive correlation coefficient with the USD is +2% on 8-26 (-7% on 8-19) for the past 180 trading 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 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 only determines 22.09% (-47% times -47% = 22.09%) of gold's price action/variability now since the USD's negative correlation coefficient with gold is -47% as of 8-26-05. The USD determines only 0.04% of silver's price action/variability since the USD's positive correlation coefficient with silver is +2% as of 8-26-05. 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 positive correlation coefficient between gold and the S & P 500 is +13% for the past 180 trading days (positive correlation coefficient with silver is +11%), according to Moore Research Center, Inc. This means that the S & P 500 determines 1.69% of gold's price action/variability (Coefficient of Determination = 13% squared = 1.69%). 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 coefficient between gold and the S & P 500 for the past 180 trading days was at 60% 15 weeks ago). The next bullet discusses the Coefficient of Determination.
  

• The Gold:XAU Ratio (currently at 4.66) may become a third major buy/sell signal signal criterion, along with 5% follow through and a clearly bullish/bearish NEM Lead Indicator. Per Myles Zyblock, Chief North American Institutional Strategist at RBC Capital Markets, when it's above 5.0 (12% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been +38.4% and in only one instance was there a loss. When it's below 3.0 (5% of the time the past 22 years) the average annual one-year holding period return for stocks in the XAU has been -24.3% with no instances of an up year. As a stand alone indicator, at least for trading purposes, the Gold:XAU Ratio probably isn't highly useful because obviously both gold and the XAU can fall 10% or more in tandem after reaching 5.0 or rise 10%+ after reaching 3.0. However, I need to research/backtest this. 5.25 or even 5.50 is probably a better criterion.
  

• The report I received via e mail from Marketocracy for the week ending 8-26-05: "JFR - Joe F. Rocks's Mutual Fund, Net Asset Value (NAV): $9.57 on 8-26 vs $9.99 on 8-19, Compliant: Yes, This past week Return: -4.21%." HUI (AMEX Gold Bugs Index) was down -3.62% last week for comparison, so JFR outperformed HUI in 14 of the past 32 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 4.30% since it's inception on 1-5-05.
  

• XAU Implied Volatility fell -1.11% to 24.530 on Friday 8-26 from 24.805 on 8-25 versus a -0.41% decline in the XAU on 8-26, which is a significant (0.50-1.99%) 1.52% rise in complacency (-1.11% + -0.41% = -1.52%. The XAU wall of worry shrank by -1.52%, therefore complacency rose by 1.52%) that portends weakness/a downtrend on Monday 8-29 (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 1.02491 for the September expiration on 8-26 versus at 0.89710 for the September expiration on 8-19 versus at 0.73494 for the August expiration on 8-12 versus at 0.95013 for the August expiration on 8-5 versus at 0.81863 for the July expiration on 7-1 versus at 0.91027 for the July expiration on 6-24 versus at 0.76954 for the June expiration on 6-17 versus at 0.87064 for the June expiration on 6-10 versus at 0.80155 for the June expiration on 6-3 versus at 0.55895 (May expiration) on 5-19 versus at 1.13583 (May expiration) on 4-22. The XAU Put/Call Ratio was at 0.65704 for the final January expiration value as of 1-21. The XAU Put/Call Ratio was at 0.79348 for the final December expiration as of 12-17-04. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19-04. The XAU Put/Call Ratio was at 0.85989 for the final October expiration value as of 10-15. If it rises 6% or less it portends strength following likely early weakness (indicated by XAU Implied Volatility). If it falls 6% or less it portends weakness. At unusually large greater than 6% moves the XAU Put/Call Ratio becomes non contrarian, so a greater than 6% rise portends weakness (unusually large rise in fear) and a greater than 6% decline portends strength (unusually large rise in complacency).
  

• A major indicator (NEM Lead Indicator) portending weakness this week (but all indicators and cycle channels/trendlines (most important consideration) must be considered collectively, not in isolation. Think "system.") is the fact that NEM underperformed the XAU last week by -0.40% (+0.98%, +0.52%, -0.08%, +0.26%, +0.81%, -0.91%, -1.00%, -2.86%, -0.38%, +0.09%, -0.39%, -0.72%, -0.69%, -1.87%, +0.45%, -2.15%, -1.17%, +0.10%, +1.83%, +0.08%, +0.44%, and +0.97% the prior 22 weeks): -0.13% vs -0.41% on 8-26, +0.46% vs +0.69% on 8-25, -2.38% vs -2.11% on 8-24, -0.42% vs -0.60% on 8-23, -0.37% vs -0.01% on 8-22.        

• The reliable non contrarian (in terms of their trading activity) gold Commercial Traders are short gold. They are clearly positioned for gold weakness (largely because of hedging) with only 70,462 long futures and options contracts versus 271,834 short futures and options contracts (data as of 8-23-05). The Commercial Traders (typically) correctly begin to take substantial profits (and sell short) as a cycle rolls over/weakens (following cycle parabolic trendline sell signals) while the Speculators tend to overshoot when making the various trading decisions (buying, selling, shorting, short covering).

• The notoriously contrarian (in terms of their trading activity) gold Speculators are correctly positioned for gold strength with 206,672 long futures and options contracts versus only 41,954 short futures and options contracts (data as of 8-23-05).

• The gold Commercial Traders sold 243 long futures and options contracts (added 4653 the prior week, sold 5908, 8248, 14,585 the prior three weeks) and covered 281 short futures and options contracts (added 48,207, 45,387, 6337 the prior three weeks) which portends weakness this week (non contrarian indicator), because of the massive short selling in recent weeks. The huge short trade three weeks ago correctly pointed to an imminent minor intermediate term cycle high. 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 8-23-05, 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) sold 2562 long futures and options contracts (added 41,184, 48,891, 6406 the prior three weeks, sold 3899, 7935, 23,682, 36,820 the prior four weeks) and covered a large 4233 short futures and options contracts (added 400 the prior week, covered 4094, 7457, 2223 the prior three weeks, added 12,036, 8147 the prior two weeks) which portends weakness this week (contrarian indicator). The huge long trade three weeks ago correctly pointed to an imminent minor intermediate term cycle high. The most important consideration in timing any market is the cycle channels/trendlines (see chart above). 

• The reliable non contrarian (in terms of their trading activity) silver Commercial Traders are short silver. They are clearly positioned for silver weakness (largely because of hedging) with only 31,052 long futures and options contracts versus 80,460 short futures and options contracts as of 8-23-05. 

• The notoriously contrarian (in terms of their trading activity) silver Speculators are correctly positioned for silver strength with 40,440 long futures and options contracts versus only 15,657 short futures and options contracts as of 8-23-05.

• The silver Commercial Traders sold an unusually large (> 10% decrease in long contracts) 4476 long futures and options contracts (sold 838 the prior week, added 1556 the prior week, sold 3170, 3715 the prior two weeks) and covered a large 4610 short futures and options contracts (covered 4503, 2360 the prior two weeks, added 10,229 the prior week, covered 4687 the prior week, added 549 the prior week) which portends strength (non contrarian indicator) this week, because the unusually large degree of long liquidation is the contrarian case short term and the large degree of short covering also points to strength. The most important consideration in timing any market is the cycle channels/trendlines.

• The silver Speculators (hedge funds and other speculators/traders) added 143 long futures and options contracts (sold 2178, 1041 the prior week, added 2416 the prior week, sold 2836 the prior week, added 1889 the prior week) and covered 262 short futures and options contracts (added 3067, 3263 the prior two weeks, covered 9740, 2765 the prior two weeks) which portends weakness this week (contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines.

• The reliable non contrarian (in terms of their trading activity) USD Commercial Traders are now correctly positioned for US Dollar weakness with 9967 long futures and options contracts versus 11,770 short futures and options contracts as of 8-23-05. Last week they added 140 long futures and options contracts (added 1260 the prior week, sold 486 the prior week, added 2674 the prior week) and added 655 short futures and options contracts (covered 8222 the prior week, added 249 the prior week, covered 3226, 1315 the prior two weeks) which portends weakness this week (non contrarian indicator), but the long trade points to some modest strength. 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 with 5710 long futures and options contracts versus 3256 short futures and options contracts as of 8-23-05. Last week they added 632 long futures and options contracts (sold 8064 the prior week, added 1359 the prior week, sold 4799, 1041 the prior two weeks) and added 300 short futures and options contracts (added 287, 232, 644, 21, 376 the prior five weeks, covered 1290 the prior week) which portends USD weakness this week (contrarian indicator). The most important consideration in timing any market is the cycle channels/trendlines (see chart above).
  

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

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

• 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), which would have weeded out all 6 important cycle lows (see next bullet) that occurred during the major intermediate term downcycle from being major intermediate term cycle low candidates, and there's only a 1.56% probability that was the result of pure luck (50% raised to the sixth power). Assuming that May 16, 2005 really was a major intermediate term cycle low then the two major buy signal requirements will have been effective 7 consecutive times and there's only a 0.78% chance that was the result of pure luck (50% raised to the seventh power).

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

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

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

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

• 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