HUI Index: Bull Pullback Or Bear Rally? (Part 3)

February 17, 2015

We started our analysis with this daily chart of the HUI Index:

Our objective is to answer this question: are we currently seeing a pullback in a new bull cycle (bull pullback) or just a short rally in an ongoing bear cycle (bear rally)? After a bull pullback we would expect to see price rising off support to start a new upleg. If the past three months of rising prices have only been a bear rally we would expect price to drop through support and head lower. We have highlighted the two possibilities in the chart below.

To help answer this question we have examined these clues:

1. Price behavior

2. Andrew’s pitchforks

3. Moving averages

4. Support / resistance

5. MACD

The first two installments of our analysis provide our findings. They can be found on the website:

HUI Index: Bull Pullback Or Bear Rally? (Part 1)

HUI Index: Bull Pullback or Bear Rally? (Part 2)

Let’s recap our findings and then draw some conclusions.

Price Behavior

Price behavior in HUI changed in November 2014. Prior to this point price was making three-month long, flowing legs without any definitive interim swings. In November price began a series of definitive swings with each leg being 2 to 5-weeks long.

When price behavior changes, we know that we should expect something different going forward. Since price has been heading downwards relentlessly for three years, different behavior in this case either means sideways or upwards.

Andrews Pitchforks

One of the valuable aspects of an Andrews pitchfork is that it clearly defines the trend. In an upwards sloping fork the trend is obviously up and vice-versa for a downwards sloping fork. If it isn’t possible to draw an upwards sloping pitchfork then the price trend must be downwards.

The blue Andrews pitchfork in our daily HUI chart is the first good upwards sloping fork we have been able to draw since the summer of 2013. The fact that we are able to draw this fork at all is more confirmation that price behavior has changed.

Another aspect of a well-drawn Andrews pitchfork is that once the fork has been confirmed we can expect it to continue describing price action going forward. Our blue fork was confirmed when price reached the median line on January 12th and then promptly reversed direction. This is one of the five behaviors we can expect when working with Andrews pitchforks.

The more price interacts with the median lines of a fork the higher our confidence should be in the fork’s predictive nature. Look at the price bars on January 21 and 22 – both of them found support on top of the fork’s median line. Then on January 27 price tested the median line from below and found resistance there. The price bars on February 10 and 11 interacted with the fork’s lower median line – the first bar found support and close above the line – the second bar found resistance and closed below. All of these interactions confirm that we are working with a valid fork.

Given that we have a valid fork we can assume that it will continue describing the price action. In the case of this fork, that would mean price finding support along the sliding parallel and then heading higher.

Moving Averages

The relative positions of price and the moving averages are currently bearish. Both price and the 50 day exponential moving average (EMA) are below the 200 day EMA.

Looking at two prior examples when price and the averages were in their current configuration, we find that price may now be poised  to begin a 5 week rally and gain 20+%.

Support / Resistance

Price has just tested a confluence of support and moved higher. These support types are:

  • The horizontal support / resistance zone between 185 and 189
  • The 50 day exponential moving average
  • The sliding parallel to the lower median line of the Andrews pitchfork
  • The 38.2% Fibonacci retracement of the December to January rally

It is reasonable to expect price to find support from any one of these types of support. Perhaps not enough support for price to reverse direction but at least enough support for us to see price hesitate before continuing downwards.

When we get a confluence of multiple support types like this it seems reasonable to expect price to reverse direction. If this cluster of support doesn’t hold we will certainly know that the bear cycle in mining stocks is going to continue.

MACD

The MACD indicator gives us two important clues:

  • HUI is in bull mode with both MACD lines above the zero line
  • Price has room to rise before MACD reaches the level of overbought-ness where another reversal is likely

Summary

Let’s place our clues in a table and categorize them as bullish or bearish. This should help the visual thinkers among us decide what the HUI is up to.

That pretty well sums it up, doesn’t it? We have six bullish factors and only a single bearish one.

Before we get too excited about the HUI, however, we should notice that there are several significant resistance levels lying not too far overhead. The upper median line of the red Andrews pitchfork sits at about 196. Then we have the 200 day EMA just 4 points higher at 200.73. To be conservative we should wait for these hurdles to be overcome before entering the mining stocks aggressively.

As always, do your own due diligence – you are the only person responsible for your trading and investing decisions.

Courtesy of Pitchfork Playground

Gold weighs 19.3 times as much as an equal volume of water.