-- Posted 29 December, 2004 | |

By: Joe Ferrazzano, Trade The Cycles

• In the 1 month charts (that show the intermediate term upcycle channels) one can see that the XAU put in a short term cycle low on 12-16, one day after it made a short term cycle high, while HUI put in a short term cycle low on 12-20 and NEM did so on 12-22. HUI, NEM, and the XAU should now leave the early flat part of their intermediate term upcycles, so the next few weeks should see sharp gains in gold/silver stocks. HUI, NEM, and the XAU spent the past week near the bottom of their intermediate term upcycle channels (see 1 month charts) and should rise toward the top of those channels in the next few weeks.
  

• An intermediate term cycle high typically occurs about 3-5 weeks after an intermediate term cycle low, so look for that in early to mid January. Only nimble traders should be trading short intermediate term cycles that typically last about 4-6 weeks, with usually a 3 to 5 week upcycle duration and a 1 to 2 week downcycle duration.

• In HUI's latest chart one can see that very strong support exists in the 214 area. HUI made 8 session lows in that area during the last few weeks which is unusual and probably bodes well for this intermediate term upcycle. The flat start to this intermediate term upcycle (began on 12-8-04) implies that this may be a long upcycle accompanied by above average gains.
  

• In the latest 1 month charts preliminary intermediate term cycle high target ranges can be derived for HUI, NEM, and the XAU based their intermediate term upcycle channels. For HUI an intermediate term cycle high target range is 230-240, for NEM an intermediate term cycle high target range is 48-50 (major resistance in the 50 area), for the XAU an intermediate term cycle high target range is 105-110. To determine the target ranges one has to extrapolate where the intermediate term upcycle channel tops will be in two weeks and consider that dramatic spike moves could result in breakouts above the channels. The target ranges might have to be revised upward next week.

• If reliable lead indicator NEM can break through major resistance in the 50 area in this intermediate term upcycle, then this could turn out to be a major intermediate term upcycle, but I suspect NEM won't break through major resistance in the 50 area until the next intermediate term upcycle.
  

• Keep in mind the intermediate term cycle highs for HUI, NEM, and the XAU that are likely to occur in the next few weeks almost certainly won't be an important multi-month top, so unless you're a nimble trader, simply holding makes the most sense. As discussed last week, the intermediate term cycle lows on 12-8-04 (occurred at 207.77 for HUI, at 43.00 for NEM, and at 95.93 for the XAU) were probably a major bottom.
  

• If you are trying to pick a top, look for a 4 to 8% (possibly more) spike move during the last few days of this intermediate term upcycle, and, look for volume to expand near the intermediate term cycle high. NEM might have a session with 6 to 8 million shares traded near the top.
  

• The reliable approach for trading short intermediate term upcycles (typically last 3 to 4 weeks) is to sell after a parabolic trendline intermediate term cycle sell signal and hopefully before a straight trendline intermediate term cycle sell signal. Intermediate term upcycle trendlines usually become increasingly parabolic/sharply risng for a few weeks, which forms what I call a parabolic intermediate term upcycle trendline, that consists of a few segments of ever increasing strength. Once that parabolic intermediate term upcycle trendline breaks down, a sell window opens for the intermediate term upcycle, and one should finish selling prior to the straight trendline intermediate term cycle sell signal. One needs to practice this "Trade the Cycles" system enough in order to become proficient at it.
  

• The long term upcycles for HUI and the XAU have increased in strength, as can be seen in the latest charts. The increase in strength for HUI's long term upcycle is more pronounced than for the NEM dominated XAU because it's not market cap weighted. The next 6 to 12 months should be the sharply rising segment of HUI/XAU's long term upcycle that began on 5-10-04, which should be an outstanding time for gold/silver stocks.
  

• Parabolic and straight trendline intermediate term cycle buy signals have occurred for HUI, NEM, and the XAU (see 1 month charts dated 12-17-04). The straight trendline buy signals confirm that major intermediate term cycle lows occurred at 207.77 for HUI, at 43.00 for NEM, and at 95.93 for the XAU on 12-8-04 and that intermediate term cycle buy signals are in effect for HUI, NEM, and the XAU.
  

• Assuming that this long term upcycle has about 6-12 months to go (will last about as long as the previous one did, from 7-26-02 till 12-2-03 for HUI/NEM and till 1-6-04 for the XAU), which is a safe assumption due to the healthy major correction from 11-17-04 until 12-8-04  (HUI corrected 16% and NEM/XAU about 14%) that probably breathed new life into the long term upcycle, HUI/XAU are now probably in the parabolic/sharply rising segment of their long term upcycle. This means that the next 6-12 months should be even better than the previous 6 months, and probably dramatically better. Long term cycle highs well above the previous ones should occur (at 258.60 for HUI on 12-2-03, at 50.28 for NEM on 12-2-03, and at 113.41 for the XAU on 1-6-04).

• Keep in mind that very long term upcycles (secular Bull market in gold/silver stocks) began in October 2000 for NEM/XAU and in November 2000 for HUI. There are very long term cycle charts below with HUI's dated 12-17-04 and the XAU's dated 10-20-04 being more recent than NEM's. An important development portending increased strength in gold/silver stocks is the fact that the very long term upcycle trendlines for HUI and the XAU are now in a sharper uptrend than they were during the first couple of years of this gold/silver stock Bull Market (see 5 year HUI chart dated 12-17-04 and the 5 year XAU chart dated 10-20-04). Gold began a very long term upcycle in April 2001 and silver did in November 2001.
  

• The Commitments of Traders (COT) data as of 12-14-04 for both gold and silver reveals dramatic repositioning on the part of both the non contrarian gold/silver Commercial Traders and the contrarian gold/silver Speculators, which indicates that both gold and silver may have bottomed. The non contrarian gold Commercial Traders added a substantial 12,197 long futures and options contracts and covered an unusually large (> 10% of the short contracts) 34,863 short futures and options contracts while the contrarian gold Speculators sold an unusually large (> 10% of the long contracts) 51,913 long futures and options contracts but did cover (what for them is) an unusually large (> 10% of the short contracts) 6597 short futures and options contracts. A similar story exists for silver.
  

• Gold's long term upcycle trendline appears to have turned up and increased in strength, assuming it's bottomed. Gold has a sharply rising uptrendline since early September that appears to be the new long term upcycle trendline. I say appears to be because there's a chance that gold is lagging gold stocks as they recently did when they peaked in early December versus gold stocks peaking on 11-17-04.
  

• The recent weakness made sense based upon the major bottom/intermediate term cycle lows that occurred on 12-8-04. Cycle rising bottoms uptrendlines usually start out fairly flat, so, after a strong rally/short term upcycle that led to intermediate term cycle buy signals for HUI/NEM/XAU, they declined sharply and their rising bottoms intermediate term upcycle trendlines have become fairly flat which is typical cyclic behavior.

• The US Dollar (USD) hit an intermediate term cycle buy signal on 12-10-04 (see latest chart). It broke above it's intermediate term downcycle trendline on 12-9 and sufficient follow through confirmed a buy signal on 12-10.
  

• An important factor to keep in mind is NEM's major resistance in the 50 area. NEM put in a double top (long term cycle high) at 50.28 on 12-2-03 and at 50.04 on 1-6-04 and recently put in a major top at 49.98 on 11-17-04. Therefore, nimble traders may get some opportunities when NEM attempts to break through major resistance in the 50 area. Since NEM is a reliable lead indicator, a clear failure to break above 50 will be a good signal to look to take short term cycle profits and maybe sell short a bit.
  

• Another important factor is the fact that the US Dollar's very long term downcycle trendline (see chart) is converging with major support in the 80 area, so a major breakdown in the USD is likely in the not too distant future and may occur in this long term upcycle (that's likely to last another 6-12 months).
  

• HUI fell about 16% from 248.18 on 11-17-04 to 207.77 on 12-8-04 and the XAU fell about 14% from 111.50 on 11-17-04 to 95.93 on 12-8-04. NEM fell nearly 14% in the intermediate term downcycle (intermediate term cycle high at 49.98 on 11-17-04 to intermediate term cycle low at 43 on 12-8-04). So, while the long intermediate term upcycle lasted nearly 4 months, having begun in late July, the intermediate term downcycle lasted only 3 weeks for NEM, which isn't unusual. The down portion of a cycle, or downcycle, tends to be much shorter in duration than the preceding upcycle if the next longer cycle is heading up (long term upcycle is in place since May 10, 2004 for HUI/NEM/XAU as can be seen in the charts).