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July 16, 2004

HUI and XAU Divergences
by Don Delavan

HUI and XAU have had an interesting pattern since their all-time lows in 2000 - if HUI leads, buy; if HUI lags, sell. Last Friday, July 9 was the third time in 2004 that XAU made a higher high while HUI made a lower high. During the previous two times in 2004 look at what happened:

On January 6, XAU made a higher high above its December high while HUI made a lower high. Both fell hard for the remainder of January.

On April 1, XAU made a higher high above its February high while HUI made a lower high. Both fell hard into May 10.

After a 2-month rally peaking on July 9, XAU made a higher high above its May high while HUI made a lower high. Will both fall hard for the remainder of July?

The answer appears to be yes. The below charts are pointing to a bottom around HUI 155-160 during the last week of July. XAU and NEM have old price gaps at 74.88 and 33.40 that should be filled in late July. These targets will be great buying opportunities for gold stocks because of its Wave 5 up into September. In the past, Wave 5 up for gold stocks has been a very strong rally, and the targets are HUI 300-315 and XAU 140-150 by late September. So gold stocks might be the most profitable investment during the late summer months. Inflation fears will probably return because the Fed is so far behind the curve, which will cause gold stocks to skyrocket into September like they did before the 1987 crash when NEM skyrocketed 122% in 12 weeks! Will we see a repeat of history?

Along with the coming decline in gold stocks, the other major stock indexes are also on schedule for a strong decline to their summer 2003 levels into the last week of July with the current cycle. But then the next cycle should rally into September and peak with lower highs than the June highs, except for HUI and XAU, which should make new highs in a blow-off wave 5 up. When you see SPX bottom just above 1000 in late July, then this will be another buy signal for gold stocks.

I will issue another article when the late July bottoms are reached. For the big picture, see Sell on the Fed News.

Don Delavan
SBRB Management Corp.

Don Delavan is the editor of the Market Waves newsletter. For subscriptions, contact dondelavan@adelphia.net

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