To 321gold home page

Home   Links   Editorials

Special SKI Report #35
Gold 'Voodoo' Indices: Stopped Out

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

USERX | historicals
Written Mar 29, 2008
Published Mar 31, 2008

Current USERX price = 17.85, Down 8% since the last report 3 weeks ago.

Introduction (repeated from prior Reports):
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 34 years.

The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found at:-
http://www.skigoldstocks.com/about.php.

Basically, the indices compare today's price to prices from a specified prior time period. The name of the index specifies the time period (e.g., 92-96 index = compare today's price to prices from 96, 95, 94, 93, and 92 trading days earlier). Although I use the oldest gold mutual fund, USERX, for analyses, the predictions are applicable to the broad precious metals' market. I do not recommend or analyze specific stocks, but my subscribers from around the world regularly discuss individual issues on our Forum. In addition to the truly unique SKI indices, I also use "run patterns" to guesstimate turning points in the precious metals' market. A "run" refers to a pattern of daily up and down market closing prices. If the market has 3 consecutive days of higher closing prices, the run is "3 up". If prices then decline for 2 consecutive days, the run becomes "3 up and 2 down". If prices then close higher the next day, the run changes to "2 down and 1 up". Some people have referred to run patterns as "worms". A run pattern is only completed after the direction of closing prices has changed. I have compiled a listing of every run pattern that has ever occurred and generated probabilities that the end of the run marks a high or a low, moderated by the indices themselves.

New Material:

In the last gold stock SKI Report on 3/08/08, I described how the SKI indices were on a major buy signal, a master 92-96 index buy signal, from 3 weeks earlier at USERX 17.55 and April gold at $910. The situation was described as "relaxing" because the SKI 92-96 index sell stop was rising each day; if the 92-96 index generated a sell signal, SKI and I would simply sell. I also reported, "THE STOP KEEPS RISING FOR THE NEXT 11 TRADING DAYS (except for this coming Monday, 3/10/08). The prediction has to be that USERX will hit new century highs (over 20.84) in 9-11 trading days from now and probably will do it on that 11th day".

First, note the comment regarding Monday, 3/10/08. The stop was falling that day and prices declined rather strongly on 3/10/08 to hit the 92-96 index, with USERX falling over 3% to 18.80. That index had bought and was the primary indicator (the SKI signal that was on "the Path" and had generated its buy signal 3+ weeks earlier). I couldn't predict that prices would fall on 3/10/08, but my comment reflected the fact that such a decline was "allowed" to happen. When prices fell back to that index, another rise was due. That was the short-term low and prices rose for another four trading days to USERX 19.93. Let's look at the 92-96 index at that time in terms of straightforward math. The mathematical formulas for the indices are public knowledge (see http://www.skigoldstocks.com/about.php for the formula explanation. The daily index numbers are, of-course, maintained on the website).

Take a look at how the market "interacted with" the 92-96 index since the last Special Report. It may have some effect on your beliefs regarding the gold market:

1. On 3/10/08 the USERX prices from 92-96 trading days earlier on 3/10/08 were:
19.08, 18.51, 19.00, 19.04, 18.96
Prices (USERX = 18.80) had plunged below 4 of those 5 index prices on 3/10/08. But it takes several days for the SKI index to generate a sell (or a buy) signal. That was supposed to be support, so SKI remained long and Jeff continued to recommend, "Buy any down days".

2. The next day (3/11/08), the gold stocks rose 3% (to USERX = 19.34). Prices rose above 4 of the 5 index back prices that were:
18.51, 19.00, 19.04, 18.96, 19.65
That was excellent, but the 92-96 index continued to weaken because the current price was lower than 1 of the 5 back prices.

3. The next day (3/12/08), the gold stocks eked out a meager gain, with USERX rising 3 pennies to 19.37. The 92-96 index back prices were rising to:
19.00, 19.04, 18.96, 19.65, 20.11
Prices had done what they needed to do to continue avoiding the 92-96 index sell signal by rising over 3 of the 5 index back prices, but the index again moved closer to a sell signal. Prices needed to start a strong rise in order to avoid generating an unexpected sell signal.

4. The next day (3/13/08; Is this getting boring?) the gold stocks experienced a strong rise that the index really needed as the back prices (the stop) kept rising. USERX rose a little more than 2% to 19.80, rising over 4 of the 5 index back prices that were:
19.04, 18.96, 19.65, 20.11, 19.73
The sell signal continued to be avoided, but the index kept creeping closer to a sell.

5. The next day (3/14/08) gold and the gold stocks rose for their 4th consecutive day, with USERX closing at 19.93, a new high. The index back prices had now risen to:
18.96, 19.65, 20.11, 19.73, 20.25
The daily rise still avoided a sell signal, but prices were only higher than 3 of the 5 back prices.

6. After rising approximately $30 in Sunday overnight trading, gold closed higher on Monday (3/17/08) for the fifth consecutive day, but the gold stocks declined. The 92-96 index was on the verge of being stopped out! The USERX price of 19.71 was now BELOW 4 of the 5 index back prices:
19.65, 20.11, 19.73, 20.25, 19.78
The next day was going to be critical. By coincidence (I don't believe that), the U.S. Federal Reserve meeting was the next day. USERX HAD TO RISE TO OVER 20.11 THE NEXT DAY (about a 2% rise in the gold stocks) OR SKI WOULD BE STOPPED OUT.

The critical index day had arrived. Gold was moving higher in the morning and the general U.S. stock market was also higher, but the gold stocks were down! A major problem for bullish SKI was that gold had closed higher for 5 consecutive days: The odds were 98% that it would close down on this 6th day and even more concerning was the fact that if gold closed higher for its 6th consecutive higher close, the odds were 99% that gold would decline the next day (Note: COMEX gold prices are used in these gold bullion run analyses and the COMEX close is at 1:30 Eastern Standard Time; COMEX gold was going to close before the Federal Reserve announcement). Even if the gold stocks ended up rising after the Federal Reserve announcement, they also needed to rise the next day to avoid the 92-96 index sell signal. However, there was a 99% probability that gold would decline the next day, thereby making it more difficult for the gold stocks to close higher.

Therefore, using the above reasoning, Jeff (that's me) sold all of his gold at $1007 during the morning of 3/18/07 while it was still up for the day and sent a sell alert to traders. (I know that you're probably reading, after-the-fact, that every analyst sold at the high, but I did sell gold at that point). Gold closed higher for its 6th consecutive day (that was dangerously bearish, at least on a short-term basis). The gold stocks continued to decline after the Federal Reserve announcement. Therefore, the 92-96 index WAS going to generate its sell signal. At 2:30 P.M. EST, the traders' alert was sent to sell the gold stocks. USERX closed at 19.17, down 3%. It had closed below all 5 of the index back prices.

When the sell signal was generated, the selling intensified, and the precious metals plunged the next day (3/19/08; Gold down $59 and USERX dropped 5%).

Conclusion: So, the powerful buy signal from 5 weeks earlier had been unexpectedly stopped out and a SKI Sell Update was sent to all readers that afternoon. The prediction from the prior SKI Special Report, "that USERX will hit new century highs (over 20.84) in 9-11 trading days from now and probably will do it on that 11th day", was proven to be WRONG. However, that's why we have objective SKI indices: One can't rely on predictions, just the indices. That WAS a relaxing period because of the objective indices. The end result was that Jeff netted about an 8% increase is his net worth (since Jeff puts all of his non-retirement funds into gold and the gold stocks when SKI generates a true buy signal). SKI officially sold at the end of that next day's large decline and netted only about a 4% profit. If you read the website's services descriptions, you'll see that Jeff attempts to help traders "beat the objective SKI indices" by a day. That was once again accomplished. But this experience highlighted the problem with using mutual funds as investment vehicles: The funds, particularly USERX and UNWPX, out-perform the ETFs when SKI is on a long-term buy signal, but the inability to sell at the market open is a disadvantage when SKI unexpectedly gets stopped out.

The final profits from that "powerful index buy signal pattern" were rather disappointing due to the much greater index-based expectations. HISTORY SHOWS THAT WHEN POWERFUL SKI BUY SIGNALS UNEXPECTEDLY FAIL, IT IS NOT A BULLISH SIGN. So, the prediction is for lower prices ahead, but once again, the prediction is not as important as the SKI indices. If SKI returns to a buy signal over the next three weeks, it will be time to buy again. In my somewhat biased view, the market's behavior in relation to the 92-96 index over those 5 weeks supported the validity of the index for the XXXth time over the past 34 years. Although I would have preferred to have made more money, the validity of the indices is most important; the indices hold the key to my future trading and investment outcomes.

Best wishes,
Relaxed Jeff

If you are interested in following and learning more about the SKI indices, I'll write another Report for 321gold in three 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 along with access to our informative Forum. The precious metals are in a very long-term (decade+) up-trend but are the most precarious, volatile, and psychologically difficult market in the world (in my opinion). That's the way it's always been.

SKI archives
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
.

Copyright © 2002-2019 Jeffrey Kern. All Rights Reserved.

321gold Ltd