AMEX Gold BUGS Index (HUI)
The HUI with 10-minute data is shown below. The 21 and 34 MA Bollinger band envelopes are tight, suggesting a move to the upside or downside is expected. Given the depth of the lower 34 MA BB, further weakness to 175 is expected. The short-term stochastics has the %K hooking down, further confirming weakness expected for earlier this week.
This is probably the most important chart in today's article. Notice the prior to purple circles to the left of the current downward decline. In both instances when one after the other, each upper Bollinger band curled down a bottom of some form was in place. Currently, the upper 21 MA and 34 MA have turned down, with the upper 55 MA BB still rising for 1-2 weeks or sooner. When this event happens, a bottom of some degree should be in. The short-term stochastics have formed a riding channel, which is a positive divergence to the decline experienced the past couple of weeks. The %K is beneath the %D further confirming weakness expected for early this week. The BB"s should indicate a bottom in the next while, which will represent an opportune time to pick up some severely corrected stocks.
The moving averages are in a consolidation pattern, with no bearish setup (200 day MA above the 155 day MA above the 50 day MA). The 155 day MA above the 200 day MA and the 50 day MA represents a divergence in the mid-term reading compared to the shorter and longer term. The full stochastics has the %K beneath the %D well below the lower horizontal channel line. A crossover of the %K above the %D will represent a buy signal.
The weekly HUI is shown below. The Fibonacci time periods in relation to the advance are shown near the top, with the 50% time level on June 10, 2005 and the 61.8% level on October 21, 2005. The Fibonacci price retracement levels of the advance from 2001until late 2003 are shown on the right hand side. The 38.2% retracement level was hit in early May 2004 (around one year ago). The blue lines show different line intersection points, having a point of convergence around 170-175. The markets have a tendency to move past any prior support areas recently and is likely attributed to high levels of stops placed near, at or lower than a trend line or key Fib support. The full stochastics has the %K trending to the basement, well beneath the %D. When the %K finally does bottom and move above the %D, a buy signal will be issued. It will be important to see "all the ducks lined up" from Figures 2, 3 and 4 to give a clear buy signal to minimize the risk of further downside. The charts up till now show the indicators while the final 3 charts are Elliott Wave for different time frames to capture movements on different time scales. Elliott Wave analysis is the scaffolding for assigning market behaviour a structure. I have found it difficult to accurately label charts without using tools such as the ones presented. Elliott Wave is a very important tool for the toolbox, but it is not the only one........it would be very difficult for a carpenter to build a house with just a hammer.
The methodology of Elliot Wave analysis I employ is based upon Glenn Neelys book "Mastering Elliott Wave". It is a stand-alone textbook of Elliott Wave analysis and converts all others on the subject to the fate of becoming book ends or replacement legs for a couch. The short-term Elliott Wave count of the HUI is shown below. Back on April 10th, an impulsive wave presented itself, which would throw anyone off. This was a cruel triple zigzag emulating an impulsive wave. Although not very common in occurrence, it did happen but lends support to the developing pattern. The decline since early March has been impulsive and the fifth wave of Minuette Degree appears it will be the extended wave of the pattern. A final bottom lies around 160-170 (not far from where the HUI currently resides). Notice how the HUI has a perfect 45o channel for the pattern. As seen with the prior charts, a bottom is not too far off. Examination of the other indicators in confirmation with the developing wave structure will aid in getting the precise bottom. An alternative count having wave II ending is shown, but I place a lower probability on this happening. Refer to Figure 6 for further details.
The mid-term Elliott Wave count of the HUI is shown below, which encompasses the entire correction since wave I completed on December 2, 2003. The market action of the past two months required some reassembly of the wave components to fit the market action. Wave C.(X) was originally thought to be the first leg of a running correction, but the depth of the decline forced it to be combined with prior wave structures. The current decline as focused on in the last chart is likely to test the low of 163 last year or put a higher low in. The pattern for wave [W].II is a complex correction and wave II could actually be over soon. However, wave III to develop is going to be the most powerful wave up of the pattern, with likely no extended fifth wave of Cycle Degree (refer to Figure 7). If this is so, then the corrective wave structure in wave II should build a Crescendo prior to wave III developing. A running correction or a rising correction is the most likely formation to develop. A running correction would entail a rise of the HUI to 300-320, followed by a sideways triangle formation for 6-12 months. Before I discuss this further, the long term Elliott Wave count of the HUI must be presented. The green line drawn in shows the suspected path to complete the pattern.
The long term Elliott Wave count of the HUI is shown below. There are four items that suggest a running correction will unfold, with wave III being the strongest wave. Under this scenario, it is likely that wave V to develop after wave III will reach slightly higher than the top of wave III. Wave I had its lower Degree wave  (Primary Degree) extended relative to the other components. Extended fifth waves are generally retraced 61.8% and this occurred with wave (W).[W].II. Interestingly, the level of wave (W).[W].II also represented a 38.2% retracement of the entire wave I. Wave I was some 6.4x higher at termination than the starting point at 35. This kind of a strong wave I also suggests a running correction is likely to develop. The entire move since December 2, 2003 is corrective and likely has wave [X] and [Y].II to form prior to wave III forming. Why is wave III not likely to actually start until later in 2006? The current time frame requires a shift in the attitudes of the general public, which take time. A running correction to balance out the current 16-month wash out in gold stocks would likely be accompanied with a large volatile triangle whipsawing for 8-12 months. Most people would assume that gold stocks were going no where under that scenario. Wave II could end in the coming weeks, there is no method of determining what happens until post-pattern confirmation. However, a profitable trade does exist non-the less in the coming weeks.