 Is
The Rally Over?
CaptainHook
Posted March 17, 2004
Newmont Mining Corp (NEM: NYSE) is painting some pictures,
we should all be taking notice, so let's do just that.
The first chart we will put up is a long-term chart of Newmont,
which presents the full specter of its impressive bull run over
the past three plus years. (See Figure
1)
Indeed a very impressive run, however is it possible NEM does
not complete a five wave impulsive count? And if it does not,
was the rally over the past three years simply corrective, destined
to be entirely retraced one day? These are two very good questions,
which we will attempt to answer for you now.
How can we do this with any degree of certainty? The answer to
this question is we cannot provide you with categorical proof,
but only probabilities and evidence, which will have to suffice.
The first place(s) one must look to fit the peaces of this puzzle
together is within important relationships NEM has with other
key components of the gold complex, of which it is a very important
part in its own right being the largest so called un-hedged gold
producer in the world, and one of the primary components of the
Amex Gold Bugs Index (HUI), which as you probably know is the
broad measure of such companies in the market.
Therefore, it makes a lot of sense to take a measure of NEM against
the HUI first, to see just how its fared via its peers. (See
Figure 2)
Depending on how one views things, with NEM one of the supposed
darlings of the institutional community when it comes to gold
companies, you should be surprised to see the extent of underperformance
against its peers traced out over the past three or so years,
no? The answer is no, because one would actually expect lesser
and smaller companies to perform better in an up-cycle, because
of their greater growth potential. So, what will it mean if the
above ratio breaks out to the upside?
Based on the above understanding, it will mean the bull run must
be done, at least for a while, because in a down-cycle, investors
will be seeking the less risky status of the larger producers
with the resources to make it through those rough years. And
based on the appearance of the above chart, a very sharp correction
will ensue in the lesser companies, with micro-caps hit the hardest
since they are at the bottom of the pile, since such a trend
change will literally call into question their very survival.
And while we may simply encounter a normal correction when the
break in the precious metals complex arrives, I find it puzzling
NEM moved in what appears to be a three-wave corrective sequence
against gold for the entire advance, where one would think that
if we are in a bull market, normally characterized by five wave
affairs, this would not have occurred. (See Figure
3)
Puzzling indeed the above should be to you if still bullish on
precious metals, as if the support line I have drawn on the chart
above does not hold in the correction, which I believe to be
upon us now in full force now, one may be able to pick up shares
of NEM one day in the future below $30 once again, which would
please me to no end.
But, and this is a big but, there are many technical and fundamental
reasons to believe precious metals and their related equities
are still in a bull market, which will be characterized by normal
and healthy / energy building corrections along the way until
proven otherwise, as although gold has not surpassed the 50 %
retracement mark off 1980 highs of $556 US yet, if impulsive
moves in the complex similar to the one we just witnessed return
once again, the next leg up should do the trick. In this regard,
we will be watching the inverse head and shoulders pattern in
the above chart for signals along the way.
Looking at some short-term considerations to keep in mind, as
I am sure most of you are content to be holding your precious
metals stocks, confident in the belief bull markets do not suffer
large corrections. I can assure you this belief is a fallacy,
as precious metals stocks are among the most volatile of sectors,
with a 25 % correction in the metal often producing more than
twice the decline percentage wise in its related equities.
Others may be waiting for confirmation the sector has officially
turned down, and even though you may still be sitting on some
sizable profits, I caution you, profits are a good thing, and
losses are not, especially if you are over diversified in the
sector beyond prudent portfolio planning metrics, or worse utilizing
margin. But if you are one of those types that needs confirmation,
and now knowing the importance of NEM in the big picture, a close
above the 155 EMA in the NEM / HUI Ratio for three consecutive
days would have to be it, based on historical standards and trend
line resistance. (See Figure
4)
Here is a chart outlining a potential result of such an occurrence.
(See Figure 5)
Here is a view of NEM against the dollar, and some technical
considerations one should be contemplating presently. (See Figure 6)
As far as bull market signatures go, the fact NEM only progressed
500 % against the dollar is not particularly disturbing considering
the HUI went up ten times against the greenback, so there is
every reason to believe the bull will be back in force after
a breather, as a ten times progression is truly impulsive. But
it could get quite scary for a while once the correction asserts
itself with force, as the market endeavors to answer the bull
market question, and possibly dealing with a bad case of asset
deflation at the same time.
Thus, if NEM breaks $40 for three consecutive closes, and the
HUI does the same at 215, we will be compelled to remove our
positive view on the sector technically until conditions warrant
a change in opinion. Does this mean precious metals stocks will
go straight down? Heavens no, there will likely be significant
bounces along the way, as both tops and bottoms are characterized
by processes, and subject to volatility. What one does with this
knowledge depends on whether you are a sophisticated trader,
or an unsophisticated investor, where portfolio planning is key
to your long-term success in the markets.
I thought you may want to know about the significance of what
is happening out there in the precious metals arena presently
before a more permanent break occurs, as although the corrective
process could be characterized by a relatively flat pattern,
it could also be very sharp as well. This would be my guess based
on the complacency currently characterizing equities in general,
and precious metals stocks certainly fall into this category,
subject to the same liquidity considerations all others are governed.
And while some gold bugs may think me a party-pooper for bringing
this to your attention, I remind you corrective processes are
a natural part of any advance, where perhaps it is better to
embrace the reality of the situation, as opposed to going down
with an overloaded ship. Most assuredly, I would love nothing
more than to see an advance characterized by high and increasing
volumes commence off present levels, but the reality of the situation
is we may see just the opposite, so be careful out there, as
precious metals can remain buoyant for quite some time before
they break down, even as the trend has changed.
Good investing.
Captain Hook
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Disclaimer: The above is a matter of opinion and is not
intended as investment advice. Information and analysis above
are derived from sources and utilizing methods believed reliable,
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may incur as a result of this analysis. Comments within the text
should not be construed as specific recommendations to buy or
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and personal financial advisors before engaging in any trading
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