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Special SKI Report #37
Life Run Gold Stock Low?

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

USERX | historicals
Written May 11, 2008
Published May 12, 2008

Current USERX price = 16.65, Down 5.5% 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 seven 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 here. 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 4/20/08, I described how the SKI indices were (1) prognosticating a decline, (2) were marking a pending head-and-shoulders top formation that would be activated when USERX closed below the 16.89-16.95 area, and (3) might generate a true buy signal on such a decline if prices remained flat for another 5-6 trading days. This current report is rather detailed and technical, so I don't know how many people will want to "suffer" through it, but I love these precise and important details because SKI depends upon them. In any case, what happened after that 4/20/08 report?

Prices went straight down. Therefore that possible index buy signal did not occur as prices fell from USERX 17.68 on 4/19/08 straight down to 16.35 on 4/24/08, and then went down again to 15.54 on 4/29/08. Of-course gold and silver bullion tumbled along with the gold and silver stocks. But the decline occurred via a special SKI run pattern (see the introductory material above or the website educational material at http://www.skigoldstocks.com/about.php for a definition of "run patterns"). The last Special Report for 321Gold also described how I was looking for a rare and special run pattern to mark a major low in the gold stocks; a run that I refer to as a "life run" low that parallels the May 2006 "death run" high. Life runs and death runs are identical, but the death run occurs at a major high and the life run occurs at a major low. Both run patterns are defined as requiring two consecutive days of higher closing prices followed by five or more consecutive days of declining prices that average at least 2% per day. Historically (since 1974), it has always taken at least two years to obtain a life run low after a death run high. Since it is almost two years since the May 2006 death run high, I wrote how the time window was now opening for the life run low.

The gold stocks rose for exactly two consecutive days on 4/15/08 and 4/16/08 to form the high that I wrote about in the last report. They then had declined for 2 consecutive into the weekend when I wrote that report (4/20/08). PRICES THEN WENT STRAIGHT DOWN FOR ANOTHER FOUR CONSECUTIVE DAYS. Therefore, the run pattern was 2 Up and 6 Down!

Was that the life run low? Prices have certainly been rising in the last two weeks, but the run pattern just missed meeting the required definition. I didn't develop that definition based upon a theory. I discovered it empirically. When I examined every possible run pattern, I found that when prices go two days up and a long hard run down, when the down run ends, an important bottom has occurred. That 6-day run down WAS long enough, but it wasn't severe enough to meet the definition. USERX fell from the high of 18.34 on 4/16/08 to 16.35 on the sixth day down on 4/24/08 before having a small up day on 4/25/08. 18.34 down to 16.35 is a decline of 10.85%. Therefore, the average daily decline was "only" 1.81%.

Your reaction may be the same as some subscribers who kept emailing me that 1.81% is close enough to 2% and that nothing can be that precise in regards to the markets and human behavior. However, there have been many 2 up and 5+ down runs averaging 1.8%. They have not marked the major bottoms. In fact, the most common pattern after such a 1.8% down run is for prices to rise for 1-2 days and then fall 4-8% in the next 1-2 days to mark a low. That IS what happened as prices rose for one day and then fell from USERX 16.42 to 15.54 (5.4%) over two days into 4/29/09. Gold bullion, which is often even more psychologically perverse than the gold stocks, made its low on 5/01/08, but the gold stocks held above that 15.54 low.

Please understand that "run patterns" provide probability statements. The only run patterns that have been 100% correct (to date) have been the rare and very long-term death and life runs. They've only occurred 8 times since 1974. Therefore, although that 2-day plunge had an approximate 80% probability of marking a low, conservative Jeff (that's me) could only write that it would be prudent to close any short positions. I didn't buy, but some readers who are more risk-tolerant, certainly bought that oversold condition.

Conclusion:

The run down several weeks ago did not meet the criteria for a life run low, but the subsequent 2-day plunge was historically consistent with "some type" of low. When SKI index signals coincide with the due date for these Special Reports, I am in somewhat of a quandary because I have to respect the rights of the subscribers. That's what occurring again now. Hence I can't provide the SKI directional call at this time (of-course this type of situation appears to be rather self-serving since it encourages subscriptions; meek smile). I can reiterate that we experienced a low several weeks ago as gold fell to test its long-term breakout point at $850 and that we have not, as yet, obtained a true life run low. The next important confluence of Time X Price according to the index back prices depends upon the magnitude of this coming week's price movement, but as of today, it appears to be setting up for 7-10 trading days from now. The prior Special Report described the term "confluence" via the high from 4/16/08, but a "confluence" can occur at either a high or a low.

Have a warm interpersonal Mother's Day, best wishes, Jeff

P.S. My 2 sons are coming over to swim and eat for Mom's Day, so I've got to stop writing and start cooking. It's a gorgeous day in Las Vegas!

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.

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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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