Market Analysis & Commentary

Gold stocks were largely flat this past week with USERX (the gold mutual fund) nudging ahead .25% to 8.92. As the dollar has continued to slide, as gold is reaching continuing new highs, and as sentiment reaches extremes, our gold stocks have mostly remained below their December 2003 and January 2004 highs. When the gold stocks lag it usually presages a decline in both gold and the gold stocks. Nonetheless, the trend is obviously still up and the mechanical system remains on its 35-39 index buy signal from 9/17/04 at USERX 6.70. In retrospect, “life” would have been easier if I had just remained long from that buy signal (retrospect always being easier and looking better).

The 218-222 index, that has been resistance throughout this rise, is going to generate its next buy signal on Monday and will execute on Tuesday’s close if USERX stays above 8.73 on Monday. It is therefore extremely likely that the signal will occur. I have been anticipating that if/when this signal occurs, that it will indicate the end of resistance.

Last week I had been looking for prices to fall so as to avoid the signal. That possibility looked good on Tuesday as the gold stocks were falling to USERX 8.77 and the run pattern yielded a typically bearish 1 Down and small 2 days Up pattern. On Wednesday, USERX clearly looked to be closing down again, with USERX needing to just fall 5 cents to stay below the falling 218-222 index back prices (that had an 8.73 in them). I was once again quite surprised to see USERX close UP 1 penny on Wednesday and therefore I had to expect a further rise on Friday (those little “trick” days are often prophetic). Friday’s rise surprisingly failed to make a new high over 8.93 (missing by one penny), and sets up another freaking 1 Down, small 2 Up run pattern IF prices decline on Monday. I am still concerned that the 218-222 index buy signal that is likely to come for Tuesday could be marking a top, but it is not supposed to be marking a top. It is a new buy signal and it WILL take more than a year for that index to sell out a profit. It is a long-term index and all of its back prices will be lower than its buy price (on Tuesday), making it physically impossible for it to make money unless USERX moves higher and stays above Tuesday’s price for at least a year. If it is marking a high, prices should immediately react and fall to sell that index out quickly at what would have to be a substantial loss of 10%.

Next I’ll follow up on the 16-20 short-term index that gave its sell signal at USERX 8.46 on 11/9/04 after having bought at 8.01 four days earlier. We are now 12 trading days past that signal. As stated last weekend, if prices stayed above 8.46 this week, we are likely to be through that resistance and prices will be free to move 20-30% higher over the next two months. This has been the pattern of the last two great rises from 12/01 to 6/02 and from 7/03 to 12/03. During each of those rises, prices fell back to a 16-20 index buy signal (coming within a day of the low) and then risen through the ensuing 16-20 sell signal. Prior to those occasions I had never seen that happen; even during the great 1970s bull market, the rise back to a 16-20 sell signal had marked a top (as it truly did in early January 2004!). The current pattern is shaping up the same way as the early 2002 and late 2003 up-trends. Each time I have sold and then waited to watch prices rise through the 16-20 index sell signal before re-entering and making a nice profit. I am supposed to do the same thing here.

So, I have the 218-222 buy signal that can be bought on Tuesday’s close, but I can’t be sure that it isn’t marking a high. And as each day continues to go by with USERX staying over 8.46 (the 16-20 index sell price), the evidence is gathering that prices have broken through that resistance. My stated plan from last weekend was that if prices stayed above 8.46 and generated a 218-222 buy signal (and that is about to occur), that I would buy in small chunks on down days over the next two weeks. Hence that’s what I am going to do, with conservative trepidation due to the extremely bullish sentiment towards gold and bearish sentiment towards the dollar.