HUI Tests 200 Week Moving Average

On March 20 we wrote about the sentiment extremes that had developed in the gold sector, with overall bearish sentiment reaching depths we had not seen since at least 2002. While noting that there has been a worrisome tendency for sentiment to diverge bearishly from gold prices at the highs seen over the past two years, a sentiment extreme of this sort almost always resolves in a rally – whether it later turns out to be a mere retracement rally is another matter.

On the HUI index we wrote:


„As the past examples of HGNSI plunges into double digit negative territory show, one needs to be alert to a potential turning point when they occur. The HUI's 200 week moving average in the 443 area is probably the level that will contain a putative 'worst case' decline, but a turn could easily happen sooner than that. If the market were to turn around very quickly and managed to close above the broken support level again, we would regard that as a very bullish development.“


In the meantime this putative 'worst case' scenario has actually happened, as the index has plunged to the 200 week moving average, something that has not happened since early 2010.



The weekly HUI with tests of the 200 week moving average indicated – click chart for better resolution.



From there a rebound has now begun  – alas, what has not happened yet is that the broken support line from the 2010-2012 consolidation has been overcome. However, the fact that a final plunge to the 200 week moving average has occurred has led to several divergences being put in, which raises the probability that a medium term low has been made. Evidently though our idea from March 30 that the 'bullish inverted hammer' then evident on the daily chart may mark the low has been proven premature, so take this with the grain of salt it deserves:



The HUI daily: positive divergences with RSI and MACD have been put in and there is now a tentative MACD buy signal as well – click chart for better resolution.



Does this mean the sector is 'out of the woods'? This cannot yet be answered with certainty. Only when the resistance level indicated on the weekly chart further above is overcome will the coast definitely be clear. Until then, we can only surmise that the mixture between sentiment extremes and technical divergences has very likely created a turning point – possibly one of at least intermediate term significance. The possibility of a future 'retest' of this low must of course be considered as well.


The Correlation Question and Sentiment

One of the questions that is surely on every gold stock investor's mind is whether the gold stocks can possibly withstand a correction in the broader market. Can one even turn positive on the gold sector when the rest of the market looks so overstretched and seems to be in danger of suffering a big correction?

With regards to this, one should not forget that over the long term, the gold sector is the only market sector that is actually negatively correlated with the stock market-at-large. The short term positive correlation that has been in evidence for much of the time since the 2008 crash is actually not a 'normal' condition. The reason for this is that gold usually tends to rise when economic confidence falters – which is precisely what normally makes the stock market  go down.  What's more, the post 2008 tendency for gold stocks to correlate positively with the SPX most of the time actually appears to be changing of late.



Since July 2011, the HUI-SPX ratio's behavior has changed. It has  clearly broken out of the broad sideways channel that pertained for most of 2010-2011 – first to the upside, then to the downside. Only when the ratio moves sideways is the correlation between these two markets positive – click chart for better resolution.



So there is a chance that the 'muscle memory' instilled by the 2008 crash is giving way to a more nuanced assessment by market participants. However, we would also warn that the gold sector has been 'slaved' to the rest of the mining sector to some extent – in spite of the fact that the trend in industrial metals should be irrelevant to the gold sector.

We ascribe this tendency to the mindless indexing games that have become so popular. 'Resource' stocks are often simply lumped together without rhyme or reason. This however should only have a short term effect – in the long term, the 'natural' market tendencies should still manage to prevail.

Meanwhile, in terms of Mark Hulbert's HGNSI (gold newsletter writer sentiment index) we now also have a positive divergence in evidence, as the low in this sentiment gauge was made shortly before the low in gold stocks occurred.

It briefly peeked into positive territory last week, but turned negative again earlier this week. Still, the aforementioned divergence has been recorded and as such is a positive datum.



The low in the HGNSI was made a week before the gold sector sold off to meet with its 200 week moving average. The gauge remains at a very low (slightly negative) level as of earlier this week – click chart for better resolution.



Gold – Looking Better in Euro than Dollar Terms

Gold itself has also managed to produce a few divergences on the daily chart before embarking on its recent rebound.

However, the rebound must now contend with numerous resistance levels, ranging from the standard moving averages (50/200) to price-based resistance. It is unknowable at this stage how long the larger scale consolidation that began in September last year will last. However, the main point remains that the structure that has evolved since then looks like a typical routine consolidation following a big run-up.

It would be very difficult at this stage to make the case that this is not a corrective structure.



Gold remains in a consolidation – the recent rebound has begun after an RSI and MACD divergence was recorded at the interim low just above the 1,600 level – now resistance from the 50 and 200 day moving averages awaits, as well as lateral resistance from the previous interim highs – click chart for better resolution.



In Euro terms, the chart of gold continues to look unequivocally bullish so far. The 200 day moving average has provided support on numerous occasions and once again seems to be doing so this time:



Gold in euro terms: consolidations often end after the 200 day moving average has been tagged – click chart for better resolution.



One potential fly in the gold ointment remains the fact that the US dollar's chart in terms of the dollar index (DXY)  also looks constructive. A sharp rise in the dollar would likely be bearish for gold, but note that this is far from a certainty. After all,  the dollar's exchange rate is only one of many factors driving the gold price. However, a stronger dollar would no doubt provide a considerable headwind.



The chart of the dollar index continues to look constructive – click chart for better resolution.



Finally, it appears that the 10 year t-note's recent break below its 200 day moving average – which as we have noted at the time turned a great many people very bearish on the US bond market – appears to have been a fake-out. Of course the same fate may be in store for the rebound that has now happened, but that remains to be seen. Generally we tend to be positive on markets everybody else seems to hate in spite of their good performance (this is notwithstanding our view that people should rather invest in productive investments than support the government's deficit spending binges).



The 10 year t-note's break below the 200 day ma was a 'fake-out' – click chart for better resolution.




From a technical and sentiment perspective it continues to look to us as though the gold sector has a very good chance to recover in the medium term. A number of hurdles remain, so this is not yet a certainty – the problem is of course that by the time something becomes 'certain' a lot of ground has already been covered by prices, so one is usually forced to anticipate things to some extent.

We haven't discussed the state of the fundamental underpinnings of the gold bull market in this post, but would briefly add in this context that they remain gold-friendly in our opinion. We will take a closer look at the fundamental factors and how they have evolved over the past several months in a future post.



Addendum: Economists No Longer Expect More 'QE'

The WSJ reports that a majority of economists are now of the opinion that no more extraordinary monetary pumping from the Fed can be expected this year.  How do they know that? Allegedly we're now in some sort of economic 'sweet spot'.


„More economists are convinced the Federal Reserve won't take further action to spur growth this year as the economy appears to be on firmer footing, according to The Wall Street Journal's monthly economic-forecasting survey. Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey.

"An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot," said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.“


This is very likely a contrary indicator.

Our friend Bart from '' has provided the following chart that shows the Citigroup 'global economic surprise index' compared to the S&P 500 and gold.



Citi's global economic surprise index has deteriorated sharply in recent weeks – click chart for better resolution.





It is clear that present conditions are not yet sufficiently bad to get the Fed to open the spigot again, recent dovish remarks from William Dudley and Janet Yellen notwithstanding. In an election year, the Fed must be extra careful after all. There can be absolutely no doubt though that a 15% to 20% correction in the stock market would provide enough cover for the merry pranksters to spring into action again.

Always keep in mind that Ben Bernanke actually believes that past secular economic  downturns could have been averted if only the central banks had been sufficiently active and had printed enough money. In reality, it was precisely such interventionist policies that turned recessions into depressions every time, but he doesn't realize that. Any excuse to open the monetary spigots again will be used to resume the money printing operations in some shape or form. Note also that the true US money supply has kept expanding over  the past several months even in the absence of 'QE'. 



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One Response to “Gold and HUI Revisited”

  • jimmyjames:

    Thanks for the always great updates-
    I’ve been adding to mid-tiers this past week-it would be good to see a few re-tests of the HUI 200 DMA here and not another rocket launch that fizzles out at the first stiff resistance-
    Maybe the miners are ending up in stronger hands with the lack of fund/public participation-

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