Gold stocks continued down this week, with USERX dropping from 8.29 to 8.01. My short position instituted last Friday is ahead 5 % and last Thursday’s email alert counts as another instant “bingo”, reaching a 10 for 10 record over about 3 years.

However, Wednesday’s crash in gold bullion and silver witnessed the gold stocks holding up rather strongly, our first sign of a positive divergence. That suggests that a low is being formed. Typically, USERX will make a lower close than Wednesday as many gold stocks test those intra-day lows. Therefore, I expect another down week approaching with the gold stocks testing those Wednesday lows.

On Wednesday, the goldies were down about 5% intra-day before rebounding. That brought USERX down to the previously cited 7.75 level. Had they closed at those lows, the 35-39 index AND the 218-222 index would have generated their signals by Friday. However, since the gold stocks rallied back on Wednesday and held up on Thursday and Friday (as USERX actually rose a little on Thursday and Friday, back to 8.01), neither signal was generated. Those signals are supposed to come. Hence, I expect a fall this week to generate both signals.

It will take at least until Thursday for the 35-39 index to execute its sell signal. It may mark a low, particularly when it is accompanied by a 218-222 index “sell” signal. My “fantasy” is that the gold stocks (USERX) will decline slightly on Monday and then continue down throughout the week, yielding a 2 UP (yes, USERX is 2 little days up into Friday!) and 5 Down run pattern, indicative of a low. Such a pattern can be used a buy signal, but I would not have a clear stop and the system would not be on a buy signal. Certainly, such a pattern would require that we cover the short position, but I would have to wait to send a buy alert until a true index buy signal is obtained.

Important, major support is at USERX 7.05-7.37 (Summer tops). That is still quite a ways down. IF USERX EVER CLOSES BELOW 7.05 THE GOLD STOCKS WOULD BE IN BIG TROUBLE. The 35-39 back prices are in the 7.97-7.75 area and the 218-222 back prices are at their lows this week (7.62-7.84). Therefore, a nice continuing fall to below 7.62 would generate both signals, even if many gold stocks held over last Wednesday’s intra-day lows.

Although that would strongly suggest a bottom, such a bottom is not one to write home about. Just a short-term low, to be followed by lower lows in the next 6-8 weeks. THIS IS JUST THE FIRST WAVE DOWN AFTER HAVING COMPLETED A CLEAR (AND REPORTED) FIVE WAVE UP PATTERN. THERE SHOULD BE AT LEAST ANOTHER WAVE DOWN AT SOME POINT AFTER SOME RALLY. A 35-39 index sell signal, although marking a low, would strongly suggest lower prices ahead. It would end the mechanical system buy signal from 9/17/04 (at 6.70) and again, even though it may mark a low, it requires that mechanical system traders/investors EXIT their long positions. The good (bullish) news would be that the system Path would then be open to a new signal (that should come at lower prices).

The 16-20 index gave its “buy” signal for execution on last Tuesday, as I stated last weekend. Its “buy” price was 8.16. Therefore, we can lower the stop on the short position: Any close over 8.16 REQUIRES covering the short position. Prices shouldn’t go over 8.16 for several weeks to months. That’s a nice close stop for now.

The current pattern is starting to resemble late 2002 to early 2003. In late 2003 we got the triple buy followed by an explosion and then, a decline back to test those levels. Although we missed a triple buy in September, it was only by one day. If you have forgotten, at that time, I stated in capital letters (and Capitals indicate a definitive prediction), that USERX “WILL come back down to 7.23 to sell the 92-96 index”. I have never recanted that prediction. 41 trading days until the back 92-96 index prices hit 7.23. We should be going back down there at that time. Prices are now back down to where I sold, after having been long for just a couple weeks and making 18%. So, as usual, I sat in cash for 2 months with no market risk, and now prices are back to the same place and should be headed lower for weeks or months (although the decline will hopefully stop at 7.05-7.37, only 8-10% lower than current prices). Click on these charts to see a traditionally bearish setup for goldies over the intermediate term, but an oversold condition over the shorter-term:

http://stockcharts.com/def/servlet/SC.web?c=$HUI,uu[l,a]waoaynay[pc13!c50!f][iUh14,3!La12,26,9]&pref=G

http://stockcharts.com/def/servlet/SC.web?c=$hui,uu[l,a]daoaynay[pc13!c50!f][iUh14,3!La12,26,9]&pref=G

A simple MACD crossover on the weekly chart has been remarkably useful for the past few years. And yet, as opposed to late 2003, when it looked like 2004 would be a down year for the gold stocks, I can see bullishness in 2005 after the next few months and as those traditional indicators reach oversold areas.

We’ll see. For now, simply put, look for further decline very short-term, a wave up and then a wave down into late January-February. Hopefully, we’ll get another true SKI buy signal at that point. Until there is the next true SKI buy signal, an impulsive move up is very unlikely. My apartments/condo-conversions close in 8 days: Las Vegas led the nation in real estate appreciation, but has been trending slightly lower since my sell last April. I’ll have more cash for gold stocks than ever before (and will have less sleep than ever if I have to commit it all to this dangerous/volatile market next year). Have a happy holiday season!

Summary:

1. Cover shorts on any close over USERX 8.16 (unlikely) or a decline into the end of this week (likely).

2. Holding long from the 9/17/04 buy signal?: Sell on a decline into the end of this week, even if it is a low. A lower low will follow. (likely)

3. A decline each day this week: Consider buying, but I have no stop and the risk is yours (a hope).

4. “Educated fantasy”: A decline this week, a rally for three weeks, and a decline to new lows in 6-8 weeks from now for a SKI buy on the Path (perhaps, we’ll see).

5. A disaster: A decline this week that just continues thereafter into a 92-96 index sell signal below USERX 7.05 (unlikely).