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Special SKI Report #14
"Over the Brink"

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com

USERX | historicals
Jan 6, 2007

Special SKI Report #14

I have been using my unique SKI indices to predict price changes in the precious metals' market for more than two decades. And my indices continue to mark the critical points. I have initiated a subscription website since 1/13/06 (yes, Friday the 13th) after having posted free updates for years at the most informative gold site, 321gold, since its inception approximately six years ago. SKI is a timing service; although almost everyone seems to believe that market timing is impossible, that IS what the SKI indices have done for 32 years and that is what they will continue to do!

The last report for 321gold was entitled "On the Brink", and it probably doesn't take a new Special Report for you to know that the gold stocks and many commodity indices went "Over that Brink" to the downside on the first day of this new year. I did report that SKI ended its true bull market from August 2005 in early September 2006. The last article on 12/17/06 contained some hope that a new bull market SKI signal would be generated; if not, the bear would gather strength. It's been three weeks since that last Report, so it's time for another report.

This time I thought I'd provide a reprint of the New Year SKI Update that is sent to subscribers every Saturday morning. It's just one-week old/delayed. I hope it makes for some interesting and informative reading. I'll write another Report for 321gold in a few weeks or you can shell out the big bucks for a SKI subscription. Weekly Updates are available by subscribing for a month (or longer if you're wise and cheap enough to want to save money) at my website www.skigoldstocks.com for the princely sum of $25 (for a one month subscription) or more ($200 for an annual subscription). I also provide more frequent intra-week messages/alerts at a slightly higher price.

SKI Update

Update Summary: Current USERX price = 16.07
New material in the Tables is bold-faced.

Current Position: Cash.
The U.S. Markets will be closed on Monday (1/01/07) and Tuesday (1/02/07) for a 4-day closure. SKI relies only on closing prices for USERX in the U.S. market. Monday and Tuesday will not exist. I've seen many such market closures (e.g., the 6 days after 9/11/01) and I have ZERO concerns regarding their effect on the indices, but if you want to see a CRITICAL POINT, watch the market on Wednesday 1/03/07.

Bottom Line: Be careful. SKI and Jeff are in cash. There are a confluence of signals, index back prices, and run patterns all coming into play right here.

The last Update of the year is "supposed" to provide the predictions and the roadmap for the next year. I've never believed in such predictions: The indices can change direction in a matter of days and it's a rare time when I can offer a prediction for a year out. Last year was different. When the indices are on a true bull, the prediction is a double in a year. Now we are still in the after-effects of the May "death run" and the indices are not in a true bull market. Hence, the meaningless prediction, that is more of an educated hope is: Down for the early part of 2007 into a "life run" bottom followed by new century highs by the end of the year.

If you want to observe market critical points, the first few days of the New Year should offer quite some "entertainment". I am quite satisfied with having NO position (or if one has a core long precious metals position that is never traded). Market analysts regularly state that the last few weeks of December are meaningless due to low volume, holidays, etc.. That is not correct. The last week of December often is very important. This past week the gold stocks rose weakly off of the XXed Out 16-20 index buy signal from 12/22/06 (USERX = 15.58; the intra-day low) while gold bullion rose strongly to the top of a potential right shoulder in a head-and-shoulders top formation. A 92-96 index buy signal that is OFF the Path has been generated for execution on the next market close. USERX closed up on Friday (12/29/06; when the gold stocks as a group closed down and I swear that USERX SHOULD have closed down based upon the prices of gold stocks despite my expectation that it WOULD close UP; USERX CLOSED UP, AS EXPECTED TO FORM THE FIFTH DAY UP) to form a significant 2 Down and weak 5 Up run pattern while gold bullion closed UP for the fifth consecutive day! If you like drama and significance, here it is! THE CONFLUENCE OF SKI SIGNALS, RUN PATTERNS, AND CHART FORMATIONS IS UNCANNY (yet such "uncanniness" is repetitive and therefore is "normal" but still amazing when it occurs). Note that USERX closed at 16.07. On the next market day (1/03/2007), SIMULTANEOUSLY:

The 92-96 index prices start to fly higher to 16.19 and keep rising for a week,
The 35-39 index back prices spike to 16.26 and thereafter all 5 back prices will be at 15.51 or higher (Note: the last low was 15.52, so prices need to fall below 15.52 to generate s 35-39 index sell signal),

The 16-20 index back prices peak at 16.58-16.94

And you/we/I want the prediction. BE WARY! SKI is on an XXed Out 16-20 index buy signal and does not miss the greater part of true bull markets. I don't care if prices rise further here; the risk is significant. Prices will not go to the moon on a 16-20 index buy signal (it's a SHORT-TERM oversold buy signal and since it's XXed Out, it can yield a loss anyway). THERE IS SO MUCH TO WRITE AND YET NONE OF IT IS PREDICTIVE ENOUGH FOR ME TO BE DEFINITIVE EXCEPT: BE CAREFUL!! THE UPSIDE APPEARS TO BE LIMITED AT THIS TIME.

We have had several upside breakouts since May 2006, including this past Thursday (12/28/06):
In early September, the gold stocks rose above their downtrend line connecting the May 2006 high and the Summer highs. That occurred on a run of 6 consecutive day up into a 16-20 index overbought sell signal. If you remember, I warned as it was happening and sold before the large move down the next week. It was a fake-out breakout.

Last month the 92-96 index gave a true bull market buy signal at 16.17 (that Jeff was skeptical of but was supposed to buy). That occurred as a weekly breakout to the upside occurred on the charts. But that buy signal failed, as Jeff sold at 16.23 and the 92-96 index finally sold at a loss on 12/18/06 at 15.73. If we are in a great bull market Wave 3 advance, I keep asking myself, "Why did the 92-96 index sell?". It would have been acceptable for prices to have declined some after that true bull market buy signal, but the 92-96 index shouldn't have sold. And then when it did sell, all the market had to do was rise again to generate another true bull market buy signal. Instead, prices went flat to lower into the XXed Out 16-20 index buy signal. I do NOT like it when bull market buy signals fail.

We NOW have had a daily upside breakout again on Thursday (12/28/06), as prices rose above the downtrend line from the early December 2006 high. Last weekend's Update reported that a 92-96 index buy signal would probably coincide with such a breakout if USERX closed for a few days over 15.95. That is what happened on Thursday (12/28/06), and since prices stayed up the next day, the 92-96 index generated its buy signal (Off the Path). The indices suggest that this could have been another fake-out breakout. The fake-out would only be confirmed by a new 92-96 index sell signal (see "Possibilities" below).

1. Here's the bullish one that I can find: Prices decline within the next few weeks to sell the 92-96 index again (actually all that is required is a decline of about 4 trading days because the 92-96 index back prices start rising NOW to 16.19, 16.24, 16.23, 16.12, and 16.18 over the next five trading days). Then prices rise a little to generate a new 92-96 index buy signal. Very strange, not expected, but that IS the bullish possibility. Note the 92-96 index will sell again in a week if prices don't RISE to over 16.19 and stay up. Such a sell would open up the SKI system Path for any buy signal.

2. Friday (12/29/06) was a high on 5 days up into an index signal and the end of the year (or the high will be sometime on the first trading day of the year, 1/03/2007. A decline will sell out the 92-96 index in a few days AND sell out the 35-39 index. All indices will be on sells. That would be consistent with the possibility that the December 2006 high was "Wave X" (see prior Updates) and that this past week's rise was a B wave high with Wave C to come. There would still be a further ABC wave down-up-down (into a "life run" major bottom?!) to come after a brief recovery. Note that this scenario still makes the most sense to me. Its problem is that throughout this entire decade bull market from the year 2000, the gold stocks have never made a lower low during a declining period. For example, since the May 2006 high, the first low was in June was at USERX 13.20, while the second low in October was at USERX 13.58. That pattern has held EVERY time in the past 6 years. Scenario #2 "appears" to require a decline below the June lows (but I can't be sure that is required).

3. If prices continue to rise from here, the 16-20 index will generate its sell signal in about 2 weeks. That should stop the advance and a small decline will immediately generate a triple sell (the 92-96 and the 35-39 index back prices will be higher than the 16-20 index back prices; a rare set-up that will be present for just one week!). THAT SET-UP WILL BEGIN IN 12 TRADING DAYS. "All sailors to the lifeboats", or should I say, "All Skiers to the avalanche protection hole". I believe that a triple sell is "too bearish", as it projects more than a year of declining prices before the next bull market phase begins. I guess one could argue that the May 2006 "death run" pattern projected 1.5-2 years of declining prices 7.5 months ago, and therefore, a triple sell would fit that projection. But the world situation just looks too bullish for such a long major corrective period. Another few months? Sure. Another year would seem to require a recession (hmmm?).

Therefore, I vote for scenario #2 and a decline sometime next week to sell the 92-96 index and the 35-39 index as the final wave down (on a multi-month basis) gathers force.

Run Pattern:
Two down and 5 days up (or more) is a meaningful pattern. But this run has been weak (rising less than 2% a day; actually <1% a day so far, rather pitiful). It HAS marked a short-term low as USERX has risen from the 16-20 index buy signal at 15.52 to 16.07. Yesterday's (12/29/06) AMAZING up close lends further credence that this run is for real, but doesn't guarantee that it's THE high (of the Wave B up). Prices could pop higher on Wednesday (1/03/2007) to extend the run to 6 days, with USERX rising above 16.19 (or much higher because the 16-20 index back prices [the sell signal on the way up] peak in the 16.58-16.96 area on 1/04/2007). And for those readers who continue to question why the indices are run on USERX and not some other measure of the gold stocks, Friday's weird rise shows yet again how for some unknown reason, it all works best on USERX (besides the fact that USERX was the ONLY broad measure available when I started the research in 1984; in my opinion, it was luck that USERX was available and that this all just keeps working).

There have been 33 runs of 2 days down and 5 or more days up. Overall, such runs have a 55% of marking a high (N=33; 18 highs out of 33 runs). During true bull markets (when SKI is on a true 92-96 index buy signal on the Path; not now) the runs are fairly irrelevant (N=10; 2 highs when the runs were 3%! a day). If we exclude those bull market times, the probability of a high increases to 69% (N=23; 16 highs out of 23 runs). Surprisingly, when I separate the runs into strong (greater than 2% up per day) versus weak (less than 2% up per day; like we have now) the difference in marking highs was not meaningful. 69% isn't a very high probability, in my opinion, but fits with Scenario #2 above (a quick 92-96 index sell signal). Such runs have extended out to as long as 10 consecutive up days, but that is of-course very rare. Here's one example of why I always write, "The run is likely to stop at 5 or 6". Five days up comprise 18 of the 33 runs. Six days up comprise 9 of the 33 runs. Seven days up comprise 2 of the 33 runs. Eight days up comprise 2 of the 33 runs. Nine days up and ten days up have each occurred once. THEREFORE, THE ODDS FAVOR A DOWN DAY ON 1/03/07 OR 1/04/07. IT LOOKS LIKE WE'LL NEED A LARGE RISE ON 1/03/07 TO AVOID SCENARIO #2 ABOVE (because the next day, after 6 up days "should" be down, and the 92-96 index back prices are rising).

Warm wishes for a healthy and happy and prosperous 2007, Jeff

P.S. Partly (but only partly) as a joke: The only indicator not giving a signal for Wednesday 1/03/06 is the full moon market direction change indicator (correct only slightly more than 50%; but statistically significant). OOPS, it is a full moon on 1/03/07.


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email: jeff@skigoldstocks.com

Jeffrey M. Kern,Ph.D., is an academic psychologist with a specialty in the measurement and prediction of human behavior. The communications provided are for informational purposes only and are not intended to be investment advice or recommendations for specific investment decisions. Dr. Kern is not a registered investment advisor, but is registered as a commodity trading advisor (CTA). The information provided is considered accurate, but cannot be guaranteed. Investments/trading in narrow market segments or gold futures is for individuals willing to accept a higher level of risk for the opportunity of greater returns. Past performance is no guarantee of future performance. His website is www.skigoldstocks.com.

Communications should be sent to: jeff@skigoldstocks.com

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