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HUI -XAU
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In our report for the Gold Mining
Stock Indices on 8-14-05, we said:
"The index has broken above 2 resistance lines and
it is getting ready to challenge the third one at 220, while
both the ADX, and, the Aroon Indicator are on a "BUY" signal.
If the pattern continues to hold, we ought to see a pullback
lasting between 2-6 days, and then another push to the upside."
Let's see where we are now:
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The HUI has achieved its upside objective and at this point the
odds favor a pullback. |
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Gold also has achieved its upside
objective, and the odds favor a pullback. |
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Notice that the XAU rallied up to its previous
highs, which represents a 45% advance from its May lows. Since
October of 2000, every time the XAU has rallied between 45% and
50%, we have gotten a pullback. In the absence of any exogenous
event, we don't see any reason why this time would be any
different. |
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A pullback can take the XAU anywhere between
105.42 and 100.49. |
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Notice the divergence between the SI25 and price.
The SI25 has made a lower low, implying that a pullback is
highly probable at this point. |
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Notice the divergence between momentum and price.
The momentum summation index has made a lower low, implying that
a pullback is highly probable at this point. |
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Notice the divergence between the T.O. and price.
The T.O. has made a lower high, implying that a pullback is
highly probable at this point. |
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The Buy/Sell Equilibrium Index turned lower from
the top of its range, implying that a pullback at this point is
highly probable. |
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Notice the divergence between the McClellan
Oscillator and price. The Oscillator has made both a lower low,
and a lower high, implying that a pullback is highly
probable at this point. |
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The A-D Summation Index is high enough to
suggest that any pullback will be followed by another new high. |
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Notice that the A-D line has formed a very
similar pattern to the one that facilitated the sharp
advance of 2003. |
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Notice the divergence between the McClellan
Oscillator and price. The Oscillator has made both a lower low,
and a lower high, implying that a pullback is highly
probable at this point. |
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The Volume Summation Index is high enough to
suggest that any pullback will be followed by another new high. |
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Notice that Cumulative Volume has
formed a very similar pattern to the one that facilitated the
sharp advance of 2003. |
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Notice the divergence between the V.T.O. and
price. The V.T.O. has made a lower high, implying that a
pullback is highly probable at this point. |
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Notice that the trend is up, which means that any pullback from
current levels, ought to be followed by new highs. |
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The hourly chart shows a "bullish continuation flag" but
we doubt it will materialize. We would look either for a print
below 107.5, or, for a reversal between 112 and 113.5 to go
short via the purchase of puts. |
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CONCLUSION:
Price has met the upside objective, both in the bullion, as well
as, in the XAU, and HUI indices. In addition, all the indicators have formed
negative divergences that four out of
five times lead to a pullback between 7% and 14%. The XAU, and
the HUI have experienced advances from their May lows, of
roughly 45%. Since October of 2000, every time these indices
have rallied between 45% to 50%, a pullback has followed.
Therefore, in the absence of an exogenous event that drives the
price of the bullion and the indices higher, a pullback with a
magnitude of 7% to 14% is imminent. Going forward we see three
possible scenarios 1) The XAU continues lower from current
levels 2) The XAU makes a marginal new high, and then it
reverses to the downside, and 3) The XAU makes a lower high, and
then it reverses to the downside. Scenarios #2, and #3 are the
most preferable because they allow for the possibility of
building a bigger position. However, we must trade the scenario
we are dealt with, not the one we had hoped to deal with!
Therefore, if on Monday the XAU continues lower, we will
buy to open the Oct110 puts, but the position will initially be
no more than 5%, and ultimately it won't exceed more 10% of our
total capital.
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