The XAU/GOLD Ratio & HUI Update
Stacy M. Himes
The ratio chart clearly tells us that an existing trading paradigm should not be considered to be permanent. For several years the .18-.28 swing lines provided excellent entry/exit points for the gold share market. Now that lower support has been broken we are faced with the need to understand how to trade this market. In my view the all time trading range support is the .15 area. The ratio has simply done a full retrace to primary support. No doubt the credit crisis has a lot to do with the underperformance of shares. It could also be argued that the shares are a leading indicator of a drop in price of the metal. So where do we go now. Well, as with any new chart formation we need more data to understand what’s going on. On first glance it would appear that a significant low is being approached and we should just buy gold shares. That may be true, but consider the possibility that this ratio is going to languish at the lows while gold works its way down to its 50% retracement near 650. That is how bear markets tend to work, if it is a bear market cycle.
So where are we on the HUI index? Here is a chart I worked up that shows a pretty clear confirmation of the so called “three peaks and a domed house” pattern. I agree it’s not a perfect correspondence. It is however pretty close. I will point out that the terminal point of this pattern is point 10, which appears to be in question as to its value. We are close now if not already there. I actually expect a bit of capitulation into a lower low than point 10, but that is not the key issue right now. Of greater importance is what happens after the pattern is finished. To wit I think we must consider the larger chart patterns, and it’s just too early to tell. In my view the bull market must expand a full order of magnitude or be subject to potential distribution parametrics within the context of declining open interest. Just to be clear, I am not a gold bear. I am simply taking the charts for what they are saying now. Clearly this market can repair itself and manifest new bullish formations. Look for this to occur, but be aware of what is prior to what might be.
Charts are courtesy of stockcharts.com.
Three peaks and a domed house pattern discovery credit goes to George Lindsay, “Encyclopedia of Stock Market Techniques” 1971. . Also visit www.thepatternsite.com by Thomas N. Bulkowski for additional pattern theory.
S.M. Himes
View additional commentary at:
http://paintthecharts.blogspot.com/
September 6, 2008
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