The Gold Bull: Alive or Dead
Gold & Silver Report
I have had a number of email requests concerning higher lows and higher highs, and exactly what they mean regarding bull and bear markets, especially for the pm sector.
The next series of charts for the HUI will be used to help explain the relationship between highs, and lows, and daily, weekly, and monthly charts, and bull and bear markets.
The main question I have been asked is how can the gold stocks be in a bull market when they are making lower highs. I will address this question shortly (well kind of shortly).
Please note that on the website's front homepage are links to a glossary and a beginners section that covers these topics and many others as well. There are also outside links for additional information.
Below in order are the daily, weekly, and monthly HUI charts.
The first chart is the daily, which means it tracks daily closing prices. At the end of each trading day a new data figure is generated and plotted on the chart. The data points are then connected forming the chart pattern(s).
The daily is considered a SHORT term chart, as opposed to the weekly chart, which is an INTERMEDIATE term chart, and the monthly that is a LONG term chart.
There are shorter and longer charts as well, but these three time frames are the basic divisions used by most. Some use 10-5-1 minute charts, etc.
Using any of the three time frames (daily, weekly, or monthly prices), one can plot the prices out for different lengths of time as well: daily for the last 6 months, or the last year, or the last 5 years etc. The same for intermediate and long term charts.
The daily chart above shows the HUI closing at 340.26, up 8.23 points or +2.48%. The 8.23 is how many points the index gained during the day on Friday - one day's worth of price action.
The chart shows the upper trend line, which is constructed by drawing a line connecting the most recent highs. As can be seen, the HUI is sitting right beneath its upper trend line. It will not take much to break above and out, although there is no guarantee it will happen immediately.
Breaking above the daily trend line is the first major step in the possible beginning of a new short term trend change, which then may develop into an intermediate term trend change, which would then be aligned with the present long term or primary trend (which is presently in a bull market trend).
Next the price needs to keep moving higher (on the short term chart) until the old high of 369.38 is breached. Note that the current price level is well above its 50 and 200 day moving averages, however, the 50 dma is below the 200 dma. For the chart to turn strongly bullish the 50 will have to cross back above the 200.
Below is the weekly chart of the HUI. Each data point consists of the WEEKLY closing price, as opposed to the above daily closing price.
The closing price is the same as on the daily - 340.26, however, note on the weekly chart it shows a gain of 21.62 points or +6.79%. This is what the HUI Index gained for the entire week.
On the above daily chart we saw the figure of 8.23 points, which was a one day gain. The weekly contains 5 days worth of price action for each data point. The daily contains one day.
Also notice that the moving averages are different, as one plots daily figures and the other plots weekly figures. The monthly is different as well, as it plots monthly data points.
The weekly HUI chart does not show the upper trend line being touched, as of yet, as did the daily. It takes more sustained daily higher prices to generate the needed weekly data to reach and then break above the weekly upper trend line.
Breaking above the weekly trend line indicates a much more powerful and longer lasting move then breaking above the daily.
This follows from the fact that the daily charts show the short term pattern (daily), while the weekly chart shows the intermediate term pattern (weekly).
Before higher weekly highs can be put in place, higher daily highs have to first occur. From this it can be seen that higher intermediate term highs are more significant then higher short term highs.
It is impossible to have higher weekly highs without higher daily highs. However, it is possible to have higher daily highs without higher weekly highs - until enough are generated to make a higher weekly high.
Note the histograms have just turned positive. The next step will be for the weekly chart to reach and then break above its upper trend line, which it is starting to get closer and closer to.
As we said above, it is much more significant and powerful for prices to close above the weekly trend line versus above the daily trend line.
Once the old high at 401.69 is breached the upper trend line will be rising instead of falling, as it has been for months. This illustrates why weekly closing prices are much more significant than daily closing prices.
HUI Weekly Chart
The monthly chart below is comprised of data points that each represent the monthly closing price of the HUI.
In other words it is equal to 4 weeks of weekly closes, or 20 days of daily closes. Hence the monthly chart represents the long term trend, as the weekly is the intermediate, and the daily the short term.
The monthly chart (prices) develops from out of the weekly charts (prices), and the weekly charts develop out of the daily charts (prices). Just as the weekly prices are more significant then the daily, so too the monthly are more significant then the weekly.
One cannot have higher monthly highs until there are higher weekly highs. However, one can have higher weekly highs without higher monthly highs. The longer the time frame - the more significant and powerful of a move is shown to be in force.
The monthly chart shows that the falling upper trend line has not yet been reach and broken above.
This makes perfect sense, as we have seen above that the weekly chart's upper trend line has not yet been broken above - and the daily chart is sitting right beneath its upper trend line.
As we said, the monthly develops out of the weekly, which in turn develops out of the daily. Hence, if the monthly chart is in bad shape - the weekly chart will be as well.
However, the daily chart could indicate something different from the monthly, as a long term trend change could be developing. Such a long term change has to start on the daily charts, then work into the weekly charts, and finally it will show on the monthly charts.
In other words all three time frames do not have to be indicating the same trend, although when they are it is the most significant price action.
Bulls & Bears
A bull market is a series of higher highs and higher lows. They start in the bottom left hand corner of a chart and ascend up in a stair step fashion to the top right hand corner of a chart (as the above monthly HUI chart does).
A bear market is just the opposite. It starts in the upper left hand corner of a chart and descends down in a series of lower highs and lower lows to the bottom right hand corner of the chart.
As we have seen, there are three basic time frames of charts: the daily or short term, the weekly or intermediate term, and the monthly or long term.
The long term trend is also called the primary trend - as it is the most important. The trend is your friend. Hence, the monthly is more significant then the weekly, which in turn is more significant then the daily.
Now the question that I've been asked: how can the gold stocks be in a bull market when lower highs have been occurring? A good question.
We have seen that there are three time frames as listed above. So an important question to ask is: when one is speaking of lower highs being made - what time frame is one looking at the lower highs being made in? Is it the daily, weekly, or monthly charts?
For example, lower highs can easily be made on the daily chart, yet the monthly chart is not affected and the primary trend is in force. Lower highs can be made on the daily charts and not affect the weekly or intermediate term trend as well.
Also of importance is that it's not just higher highs that matter - higher lows are just as important. It takes BOTH to build a bull market.
Likewise, for the primary trend to change - BOTH lower highs and lower lows must occur on the monthly charts. Then the trend has changed from bull to bear.
In other words, just because short term or even intermediate term lower highs are being made, as long as lower lows are not also being made makes a big difference - the difference between a bullish trend and a bearish trend.
Go back up to the monthly chart of the HUI. You will see that a continual series of higher lows is in place. The bottom trend line is headed up, yet the upper trend line is headed down.
The price action is contained between these two trend lines. Eventually one of two things is going to occur - the price action is either going to break above its upper trend line, or break below its lower trend line.
If it breaks above, the bull market continues on at an even stronger level. If it breaks below, then a long term trend change will occur - the bull will turn into a bear.
It Is Until It Isn't
Until it isn't - a bull market is in force. In other words, until such time that both lower highs and lower lows occur, which will break the rising lower trend line - a bull market is in affect.
Now go back to the weekly HUI chart. The high is 401.69. There is a lower high in place at 369.38. Does this mean that a bull market can not be occurring? No it doesn't.
Such may be the case, but we will not know for sure until lower lows are also occurring - and on the monthly or long term chart. Before that can occur, the bottom trend line on the weekly chart will first be broken below.
Look at the bottom trend line of the weekly chart. There is a low at 278.47 and then a lower low at 270.54, but then the pattern changes and a higher low was made at 274.72.
Presently the weekly close was at 340.26, which is just below its UPPER trend line and quite far from its lower trend line. A bull market is in effect until it isn't - and right now it is, AND it is MUCH closer to breaking out above its upper trend line than it is to breaking down below its lower trend line.
As long as higher lows are in place the bull is alive. As long as higher lows are kept intact, higher highs will come. For a bull market to sustain itself, it is more important that higher lows are made, as higher highs will develop as long as higher lows are occurring.
All of which means that it is possible to have lower highs (as we presently have) and yet have a bull market in force (which we have). The bull market is alive until it isn't, and that will not be until BOTH lower highs and lower lows are made.
When and if such occurs on the monthly charts, THEN and only THEN will a primary trend change occur. The bull will then turn to a bear. But it is far from there as of now.
We are of the opinion that a new leg up in the bull market is about to occur, and that the high at 369.38 will be taken out within a couple of months, and the high at 401.59 before summer of this coming year. Patience will be rewarded.
The one caveat that could change this is a melt down of the global financial system, which in paper fiat land with derivatives of 7 times world gross product - is unfortunately, always a distinct possibility. This is why physical gold is safer then gold stocks - or paper gold.
The weekly chart of gold below shows gold closing at $635.40 up $12.90 or +2.07% for the week. It is above both its 50 and 200 dma's and it has broken above its upper trend line.
A series of higher lows can be seen in place. MACD and histograms are both turning up - all very positive action. This week's closing was the highest weekly close since August 4, 2006.
Gold Continuous Weekly
The next chart is the hui's performance compared to physical gold. The upper trend line has just been broken above, which is very positive action.
The higher the ratio the better the gold stocks are performing compared to physical gold.
Silver closed the week out at $13.23 up 0.43 or +3.34%. It too, is above both its 50 and 200 day moving averages, and it has broken out above its upper trend line.
A series of higher lows has been put in place to form the base from which the rise up is occurring. MACD and histograms moving upwards. This week's close was the highest weekly close since May 16, 2006.
Interest rates remain key, as the dollar and bonds are both strongly affected by rates. This week's sell off in the dollar shows how future expectations on rates can move the dollar.
The Fed has its desired inverted yield curve, however, it remains to be seen if the long end stays down. As mentioned the ten year yield may be forming a triple bottom.
If it does, unreal estate will have more problems then it presently has, which are quite a few. Purchase Applications are down 14.4% from a year ago.
The International Monetary Fund expects unit labor costs to continue to rise to the highest levels in six years. If they do - wage inflation will put pressure on interest rates.
Many have been calling for a meaningful rally in the US Dollar, so far it hasn't materialized. If the dollar breaks to new lows there will be hell to pay - and nothing to pay it with.
All of which is not going unnoticed by gold and silver. Along with oil and the Crb Index the pm sector took a good hit. So far the pm's have been recovering the best. With winter coming energy costs may likely rise, especially natural gas.
There may still be a week or two of weakness in gold before the next major move up begins, however, it appears that such will occur before the New Year.
The extreme level of derivatives is an accident waiting for a time and place to happen. When it does it will not be pretty. All things paper will be affected.
We keep asking the question as to why have the Middle East stock exchanges lost 40-60% of their value, while Russia, China, and India are up by huge percentages.
Is either an indication of what is to come for the overall world markets? We suggest erring on the side of the former rather than on the latter.
See the update gold portfolio below and the market indicators. We plan on accumulating further positions in the pm sector on any weakness. We are watching oil and natural gas for a good entry point.
Good luck. Good trading. Good health. And that's a wrap.
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