Another Island in the HUI

The heroin junkies in Scotland are trainspotting, the gold bugs in the US are gap-spotting. Ever since the HUI began its decline, it has increasingly looked like the gap-toothed grin of a 125 year old Caucasian nomad shepherd (they get so old because they drink kefir every day, but there is a lack of dental prostheses in those craggy mountains. Contrary to the HUI, they go both up and down, not only down).

The recent rebound in the gold price has been far more spirited than the bear flag it built last time around between $1,350 and $1,400, but unfortunately the  HUI has not behaved any differently. In fact, there are many parallels so far.  Let's look at the gold price first:




The recent rebound in gold had more pizzazz than the bear flag it built from mid-May to early June – click to enlarge.






On both the occasions marked above, the HUI rebounded and left an 'island' behind in the process – this is to say, it first gapped down, then meandered around a bit, and then gapped up. Normally such behavior would be regarded as bullish, if not for the problem that it wasn't last time around.

Let us look at a daily chart of the HUI next. The problem from a technical perspective as we see it, is that previous large gaps down represent strong resistance levels. Therefore, in order for the market's character to actually change, we think it will be necessary for the index to finally conquer one of these gaps on the way up.





Hui, daily annot

The two HUI rebounds corresponding to the rebounds in gold circled above both included the formation of islands. Previous large down-gaps have proved to be insurmountable resistance so far – click to enlarge.



The question whether the most recent island will be more meaningful than the last one should soon be answered. So far, it all looks a bit lame – presumably because the market is expecting the usual earnings-related sell-off. On the other hand, not too many of those sell-offs can occur anymore before many gold stocks hit the strongest support level there is (namely, zero). Just kidding of course – in reality, when stocks go down, the process is a bit reminiscent of Zeno's race course paradox. If a stock's price gets cut in half, it can get cut in half again…and again…and again – as infinitum. There is no limit beyond the minimum prices demanded by listing requirements, and those can always be restored by means of reverse splits. We are not saying that this is in store by the way, just noting that it is possible in principle. For a slightly scary example of what can happen, look at certain coal stocks like ACI or ANR. ACI traded at $76 at its 2008 high – recently it could be bought for $3.49. That means it fell by 90% and then fell by another 55% from there, for good measure. But then again, it is a coal stock and not a gold stock.

Here is a close-up of the recent HUI island:




The HUI over the past ten trading days. So far the gap that separates the island from the trading since then has provided support. The next major resistance zone (the previous gap down) begins at about 238 points – click to enlarge.



Even though we obviously cannot know when or from what level a sustainable reversal will take place, it can be stated that the market's character has not changed yet. It can also be stated based on the HUI's behavior to date that a change in character will have taken place once a downside gap fails to provide resistance and is overcome. So this is one of the things short term oriented traders should look for, especially as one impoortant technical ingredient for a reversal is already in place, namely a divergence between prices and momentum oscillators like RSI and MACD.

An additional point worth making: if the current bear market indeed corresponds to the 1974-1976 mid cycle correction, note that gold stocks were still 50% below their 1974 peak when gold returned to its level of late 1974 in 1978. Gold then rose much further into early 1980, but gold stocks only managed to reach the same level they had already attained in 1974. They were very volatile along the way, so 'trading around' oversold and overbought situations was a good strategy at the time. Ironically, gold stocks then rallied hugely after gold had reached its top – when it rose into its secondary peak between April and September 1980, they rallied to about twice their level of January 1980 (a brief summary of the events with charts can be found here). The market had finally become convinced that higher gold prices were here to stay when it was all over. This fits well with our previously stated thesis that the market usually 'knows' absolutely nothing, especially near major turning points.



Mr. HUI's enigmatic grin.



The craggy highlands of the Caucasus. The next dentist (not visible) is in the valley behind the horizon.




Charts by: BigCharts, StockCharts




Dear Readers!

You may have noticed that our header carries ab black flag. This is due to the recent passing of the main author of the Acting Man blog, Heinz Blasnik, under his nom de plume 'Pater Tenebrarum'. We want to thank you for following his blog for meanwhile 11 years and refer you to the 'Acting Man Classics' on the sidebar to get an introduction to his way of seeing economics. In the future, we will keep the blog running with regular uptates from our well known Co-Authors. For that, some financial help would be greatly appreciated. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Zombie Ship of Theseus
      The Zombie Ship of Theseus The Ship of Theseus is an old philosophical thought experiment. It asks a question about identity. Suppose you replace all of the boards of a ship with new ones—is it still the same ship? We are not going to try to resolve this millennia-old paradox. Instead, we are going to add one more element, and then tie it to the monetary system. The additional element is what if the replacement boards are adulterated in some way. That is, each new board is warped,...

Support Acting Man

Austrian Theory and Investment


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

    Buy Silver Now!
    Buy Gold Now!