Wednesday, May 16, 2007

HUI Update

The technical landscape for the HUI index is starting to deteriorate. As most traders are aware a neat trading range has been in effect for months now. Trading ranges eventually come to an end and this one will be no different. The 20, 50, and 100 week bollinger bands do a pretty good job of defining the swing parameters of this bull market on the key time frames. Since we are now getting some downside trendline penetration I would submit the trading range is shifting to a down bias. Support is strong at lower BB50. Therefore we will assume a breach of that support area is a very significant event. Until then the swing lows for trading purposes will be the 300 to 310 area. If you are paying attention you will also note that the multi year log uptrend line has been pierced as of today. This comes on a already oversold reading. Therefore you would expect a decent tradeable bounce on further weakness.
Finally, I think it's noteworthy to examine the BB100 bands and a fractal comparison between the current pattern and that of 2004. I have pointed out in the chart and in previous posts that the wide bands do not support a bull market advance. Now in this chart I am suggesting that that little fractal in 2004 may be similar to the whole trading range we have had for the last year. This would suggest a correction of one degree larger this time around and is consistent with the wide BB100 bands. Clearly there will be steps and trade setups both long and short in-between, but thats the way I see the big picture at this time.
In terms of wave count I see the october 2006 lows as a W in a compound zig zag or potential flat pattern. Unfortunately the shallow uptrending triangular pattern that followed does not satisfy me for a bullish ending pattern. The problem with the way the pattern progressed is that is was on a slow rise, which essentially got the index precariously overbought. A better setup would have been initial action to the downside with frequent trips to oversold during the pattern. So now my view is that the pattern looks more like distribution in a manner similar to the 2004 episode.
In the very short term I expect a tradeable rally to start at any time in the next few days. We'll just have to see how far it gets. If you are following the xau/gold ratio then you see we continue to bang against that .20 area. I continue to believe accumulation should not be a automatic habit at this level. I would start accumulation when gold is just under the 65 week moving average and the ratio is under .19.

Gold Seasonality

Gold Seasonality
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