HUI Harmonics Analysis

By: Captain Hook | Wed, Oct 8, 2003
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The following is a commentary that appeared on Treasure Chests several weeks ago, and although the markets have been both higher and lower since then, the basic understandings below remain in full force.

Are we at a short-term crossroads in the precious metals complex? Perhaps, but if the signatures that exist with the harmonic progression of HUI remain constant, the pause should be fairly brief. Signals within the macro-environment are pointing to a deflationary posture in the short-term, lets see what the inner workings of the metals complex is saying how it will fare.

As suggested yesterday, we may very well be in for a period of short-term weakness in the commodities complex. This will certainly hamper gold's advance, but at the same time, the Fed has been flooding the system with fiat, so the balance may still be in favor of gold being able to act well against impeding money flow shifts that may be upon us soon. Lets take a brief look at the pitchforks, Fibonacci projections, and count applied to gold in the current advance. (See Figure 1)

Figure 1

As you can see from the Elliott Wave count it is possible the move is done, that's what the gold stocks were suggesting yesterday, however the degrees of the inter-waves labeled 4 and 5, to complete C are not sufficiently balanced against the others, which makes it far more likely they are lesser degree subdivides. If you don't know what that means, it's basically in favor of more near term strength, after a brief rest. Since the gold price was unable to achieve the more restrained (Golden Ratio) projection target as of yet, with time for the move running short based on the eight week cycle, we will either catapult to the ~ $400 target over the next week or two, or the this cycle will be truncated and have to recharge for another assault on the $400 objective later this year. The precious metals stocks (PM's) are suggesting either is possible as well. So, if we do see near-term weakness, sooner or later, perhaps once the deflationary forces have run their course, the first primary wave in gold's bull market will have some unfinished business to the upside at that time. A quick look at the count on the Amex Gold Bugs Index (HUI) suggests we may be entering inter-wave 4 of secular wave 5 of primary wave A. (See Figure 2)


I'm certainly not going to suggest that its not likely we will correct now, perhaps over the next couple of months as stocks in general begin to exhibit price tendencies associated with a deflating macro-environment, but it would be a little early for us to see too much weakness at present, in relation to the idea we should see some greater degree of parity to the time element experienced in wave A denoted above, if not an extension. As well, I find it remarkable the PM's have held up so well considering we are at options expiry today, with the knowledge many of the stocks are trading well above equilibrium price levels, in relation to the distribution of contracts to their respective strike levels. In fact, I would expect the PM's to hold up quite well until the broader markets have been correcting impulsively for several weeks if history is any guide. But, I think it prudent at this point to examine both possibilities at present, because as indicated yesterday, the negative drag of deflating commodity prices is surely not the best environment to support a continued advance if it persists. (See Figure 3)

Figure 3

I am switching to a weekly format now to filter out noise, so that we can more clearly focus on what the charts are telling us. The first thing to focus on in the above is the Fibonnaci projection for inter-wave (iii), as these numbers certainly support the hypothesis we are about to enter inter-wave (iv) down. One should notice that although the HUI did trade 3% higher than the 199.24 level, it was unable to close above this point. Coupled with the potential reversal candles present, and the possible breach of the up-trend line this week, suffice it to say anything is possible. That's the potential short-term negative view, and with that we will move on to a new chart to examine the degree of a possible pullback now, but return to this chart later to talk about those other two little gems denoted above. (See Figure 4)

Figure 4

I have updated the chart to include the recent price action into the projections.

I think you are going to enjoy the potential implications of this chart, even if we do correct down to the ~ 160-165 area. If we do enter an inter-wave (iv) scenario at this time, with a 50% retrace of the move in wave E so far likely in that event (notice I am not defining the retrace in textbook Elliot Wave Theory parameters to keep it simple), the harmonic signature of the entire move in the HUI from its bull market origin back in 2000 suggests it will be but a bump in the road, as the next progression sequence could take us as high as ~ 350, if the geometries of the previous impulse (Wave C) double once again. One should notice we have had only a linear progression thus far (~ 95 points), and the engrained harmonics (i.e. impulsive strength) suggest that at some point over the next two quarters the HUI could complete a sine wave event. If you think this is not possible, just look at the degree of the extension in inter-wave 5 of wave C denoted in Figure 4. The fact of the matter is bull markets progress in geometric proportions on a nominal incremental basis, but only on a linear basis as far as the harmonics is concerned (i.e. the signature repeats). Once the signature is in place, and you have identified the dimensions, it would be truly foolish to under estimate the consistency of which the established interval will recur.

If you return to Figure 3 now, you will observe some other Fibonacci based projections based on the known waves of the current progression. I have to tell you the likelihood of the harmonics identified in Figure 4 directly above being superceded by the more localized vibrations in wave E are fairly remote, but certainly not impossible. The question then becomes, "how do we prove this?" The answer is by utilizing verifiers. What could we possibly use as a verifier in this instance? The answer to that question is a comparable study applied to the HUI / Gold Ratio. (See Figure 5)

Figure 5

Again, we will assume that a pull back is in the works, and to be conservative, at least as far as the calculations above are concerned, will project off of the base of wave E, just as in the case of wave C. Within the figure directly above, you should notice that the "Golden Ratio Projection" (GRP) off wave A did in fact exactly match the total nominal gain for the move in wave C. Utilizing the same technique as applied to projecting a potential point gain for wave E then, we arrive at a ratio of .75 denoted above. Putting some numbers to the formula, with an assumed eventual print of ~ $500 on gold sometime in the first half of next year, perhaps even as early as the first quarter (my preferential view), the actual point value for the HUI would be 375 (500 x .75). Apparently, this verifier is indicating we may be conservative in the assumptions made in the previous charts, but then again we don't know whether gold will actually achieve the $500 mark. It sure has a good chance of doing so though, in my opinion. (See Figure 6)

Figure 6

Well, that's all I really have to say today. Just a few thoughts you may find useful going forward. Think of the commentary today as a reference piece, something you can refer back to at a future date if your convictions as to the potential power in this PM bull come into question. And certainly utilize it for planning purposes as if we do get a pullback now you should be able to decipher for yourself where to buy.

Lastly, I would like to state something obvious that you may not have noticed, which we all do at times. Gold has not pulled back much considering the prognostications commodities are about to crumble. What gold is saying, as far as its historical role is concerned, is it doesn't think that's going to happen.

Some food for thought to send you on your day.


Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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