HUI, GG - November 14, 2009

Last time I wrote about PM miners was November 1. At the time, the group was in a bout of selling. I said

The divergences took their toll on HUI. Notice that shorter term McClellan Oscillators are at oversold levels not seen since mid 2008. Also notice that HUI is near support from October 2008 trend line, which coincides with 144 MA, and a price area around 360-375

And

Given the oversold breadth and momentum conditions, and the vicinity of support, HUI may bounce here or after some residual selling. I have not decided if I would participate in any bounce from around here or not. If I do decide to take a chance, it would be at small measures, maybe using options, with very tight stops, and with intentions to get out quickly. Ideally, I would like to see some positive momentum divergence prior to a short term buy signal.

The group bounced as was expected, but much more than I had anticipated. So the buy signal came, but the stop wasn’t hit.

It was one of the most dramatic reversals I have seen. In the course of a few days many got chopped to pieces either way. All we did was getting defensive as I discussed in the post of October 18, and then playing a possible bounce off support as I discussed in the post of November 1. Well, sometimes, I get them right, but I did not expect it to be this right :-)

What about now?

During the sell off, breadth oscillators got very oversold, which was one reason for me expecting a bounce. They shot up in the bounce and are currently neutral

It’s a good start, but you know the drill, some get excited and short when the thing is already oversold, and then the squeezers come in and roast the late shaky shorts, and we get a rally. Meanwhile, India goes on saying that they intend to increase their gold reserves and scares the hell of everybody with a short across the area and the rest becomes history.

So, the shorts run for cover, price makes a new high and breadth becomes neutral. Now it’s the time for HUI to prove itself through consistent improvement in its breadth

Right now, breadth measures are negatively diverging as you can see from the chart above and these two charts below




In order to better visualize the dramatic price action of these past few days, take a look at this P&F chart of HUI


Crazy action in just 12 days.

Throughout the whole thing, HUI did not change its OEW trend, and stayed in an uptrend. Some senior miners, on the other hand had a change of trend like ABX, AEM, KCG, and GG.

From a trend following point of view, one would have expected others to join and take the entire index into a downtrend. But then things turned and some trends changed as well – all in just a few days. AEM and KCG are still in downtrend by the way. How does one play volatility like this?

Well, one either has a strong conviction and stays a longer course with much wider stops, or one trades the short term moves with very tight stops.

Notice from the charts above, and from this daily chart of GG that short term moving averages did not even cross, so an MA crossover system might have stayed the course.


But, on the other hand, the channel broke, and that would get many into short positions. Then a rise to the underside of the channel might have been another place for a short just based on channels and trend lines. I really do not have an answer. These things happen. I would like to say we got it right due to an extensive study of sector internals and price structure, and that may be somewhat true, but there was a good bit of luck involved as well.

If the bullish count on GG is correct, stock has entered its final leg (major 5) up before completing a Primary degree wave. All that is required from a successful 5th wave is to make a new high. And we have that now.

Some of you may remember that I had two targets for GG, 43 and 47, those are from my own algorithms

In addition, if I do a wave 5 to wave 1 fib ratio, I get

45 = 5 = 0.50% 1 – achieved

47 = 5 = 0.62 * 1

51 = 5 = 0.78 * 1

55 = 5 = 1 * 1

60 = 5 = 1.27 * 1

67 = 5 = 1.62 * 1

All targets are theoretical and nice to have. Stops are, on the other hand, must haves.

I have bolded the ones I am interest in at this time

The intraday high of July 15, 2008 was 52.65 – keep that in mind

There is support from MAs. There is a strong support shelf around 32.5-35 (another reason I played the bounce).

There is an open gap around 41 which, IMO, is an important area to watch in coming days

From now on, assuming the count is correct, it's a trend watch, a trend change anticipation game for me. The next OEW (mid-term) downtrend may pack a serious punch. More on that as things develop.

Have a Nice Evening!