Still in Wave II of the HUI Running Correction
David PetchThe threads below shows the "YOU ARE HERE" picture from July, 2004 which was an update from the count proposed last year (second thread).
July 2004 Continuation of the Elliott Wave counts from September 2003:
September 2003 Proposed Elliott Wave count:
There are A LOT of people who try to discredit Elliott Wave, but hopefully the two "YOU ARE HERE" charts above lend support. Elliott Wave patterns are easiest when the trending pattern is impulsive or a bull market. Corrective patterns as mentioned many many times can be a flat (3-3-5), zigzag (5-3-5), triangle (3-3-3-3-3) or a complex correction (3-3-3) constituting many combinations and permutations of the three thereof. How was one able to conclude that after wave I completed that wave II would be a running correction? This article will attempt to explain the conundrum. On November 15th, 2000, the HUI put in a low of 35.31 and rose to a high of 258.6 on December 2nd, 2003. The bull market run was a hair over three years. The advance from the low to the high represented a 7.32 fold advance from the low. To my knowledge, this one point has never been mentioned for determining whether a wave II will be a running correction. Minimally, if an index advances a minimum of 5 fold higher in wave 1 of some degree from low to high, the probability increases that the following wave 2 of some degree will be a running correction. Very very simple, nothing elaborate, and no black magic. Just plain simple math.
The wave II correction has left most people trying to do Elliott Wave on the HUI pulling their hair out. Doing Elliott Wave requires examination of ratios for internal waves to project the behaviour of subsequent waves. The fifth wave  of wave I in the HUI was extended (more than 161.8% relative to wave  and wave . If a bull market is under way, extended fifth waves CAN NOT be fully retraced, but a sharp decline non-the-less will occur and did. Running corrections require the wave [X] to be a zigzag (5-3-5). The advance in wave [X].I will move slightly above to significantly higher levels than wave I, followed by a triangle in wave[Y] going horizontal to a sloping upward bias. The higher the slope of the triangle, the more powerful the wave III will follow.
What I will say is the HUI pattern is in wave [X].II, but will not specify the precise location in this article. Trading gold shares at this juncture is futile. The advance to follow will have a large triangle ranging in size from 8-12 months, maybe more pending how high the wave [X] develops, and whether or not it morphs from a zigzag to a double zigzag. The gold bull market is just getting started, but later in the cycle it will be best to own gold and silver bullion, if one can even purchase it later in the cycle.
Before I explained that rising oil prices are deflationary, so I should explain further what I meant. Cheap oil allowed the economic expansion throughout most all of the 1900's. Oil supply drove technology, which is why the technology pool of knowledge doubles every two years or less now. This created a surplus of knowledge that can not be assimilated fast enough into products, which translates into products having a very short shelf life before they become obsolete. Cheap energy caused this technological surplus with no method for reaching the public for up to a decade in some instances. A rise in energy prices will bring technological innovations to a grinding halt as the oil boom continues. Technological advances will be made in methods for more efficient extraction of gold, water purification and oil sand extraction. The technologies developed over the coming decade will be to maximize extraction technologies in the resource sector.
Higher oil prices will translate into higher prices all around. The cheap technologies due to surpluses and ease of credit has allowed people to purchase many toys that would not have been considered important 30 or 40 years ago. People will purchase fewer non-essential items due to more disposable income being shifted into basic necessities. This is deflationary with respect to personal income since people have less capital to invest. Higher commodity prices overall though will be inflationary. The current global market structure requires a continual expansion. Since the US is bust, they will have no choice but to print more currency. This is classically considered inflationary. What happens when everything implodes? Deflation follows. That is a given, but the given requirement for pension funds to seek growth will eventually see a flock to precious metal and oil stocks.
The pension funds are likely to load up on gold and silver stocks during the next two years and even add more to their positions as the bull market unfolds. As things begin to heat up in 2011-2013, the pension funds will begin to feel the pinch from their pension fund obligations and will likely start to slowly start selling (distribution phase). The smart people holding their shares will have been reluctant to give them up to this point, but more and more people will gradually begin to feed the shares to a market for those late comers who are seeking instant rags to riches. The biggest psychological guarantee for making money is to give something to someone that has been deprived of obtaining something. Think of a bigger sister saying to the younger one, "You can not have this because you are too young", or going to a bar when under age "Sorry fella, you are too young to drink". This creates internal anxiety and the individual wants to have what they can not have or do. This is an irrational state of behaviour, and this causes people to do crazy things, like the final stages of a bull market. The final stages of a bull market are based upon irrational behaviour. Pension funds still will go bust around 2015-2018 if they have not had that happen yet, but the resource boom of the next 10 years or so will line their coffers somewhat.
There likely will be a technology boom in 2015-2025 (maybe longer) or so that will take the DOW to 100,000 but this will be based on hyperinflation I believe. Glenn Neely altered his longer term count recently, and it suggests the DOW and S&P is in wave IV and will last for another 10-15 years. The S&P is likely to continue going sideways between 850-1500 for the next 6 years or so in wave [B].IV before wave [C].IV kicks in. I think wave [B].IV will represent the top of the gold bull market. In 1980, the S&P was approximately 20% or so gold stocks and 25% oil stocks. The fluidity of the index adjusting the sector ratios for the economic performance will be what keeps the S&P in the defined trading range. The S&P at 1000 or 1300 in 10-15 years from now would be like a decline in the S&P to 250-300 tomorrow. In actuality, the slow grinding process with the index in the same range is actually worse. People retiring are going to see their pensions collapse and will require growth for living. The baby boomer retiring, and needing to pay their debt down is going to be the driving force for putting gold and gold stocks etc. to incredible valuations. I think the HUI will top out around 1700-2000. I will be a seller in this range, but who is not to say the HUI goes to 3000 or 4000? During a period of hyperinflation, selling stocks usually requires around one week to be mailed or electronically transferred to a bank account. This will make people not want to sell, and just keep feeding the run up in stock prices. A shift into bullion at a HUI of 1700-2000 for physical delivery is recommended. At least when the balloon of the bubble is burst, the bullion will retain its value relative to deflating assets everywhere. If gold goes to $8000/ounce and falls to $2000/ounce, that could hurt, but real estate falling from $200,000 down to $20,000 or less could be worse. At some point, paper currencies will not mean much, and the actual ownership of bullion will be more important.
That is all for now. For those interested in knowing how the wave structure will develop, and where we are in the HUI, check us out. We are the only people who accurately called the HUI developing a wave II running correction last year (September 2003), which will seem so obvious in 2-3 years from now when wave III has started. We also use Elliott Wave analysis is also used to track the S&P 500 Index, AMEX Oil Index, 10 Year US Treasury Index and the US dollar index.
Market Letters Digest
October 31, 2004
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