Special SKI Report #104
Long-term Cycles and Death Run tops

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written May 19, 2012
Published May 21, 2012

Current USERX price = 10.29, Down another $1.40 (12%) since the last report 3 weeks ago.

Introduction (repeated from prior Reports):

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

The last gold stock SKI Report, written on Sunday 4/29/12, concluded that another decline in the gold stocks “could not be ruled out” (I did not “predict” another decline) because the HUI’s long-term 442 index was executing yet another buy signal the next day and the prior two such signals had recently marked highs. And the gold stocks (USERX and HUI) continued to be below all of the regular SKI indices, so the long-term cycles were continuing to be the primary influence. The long-term indices are the master 221 index, the 442 index, the 663 index, and the experimental 884 index. The 663 index, for example, compares the current price to prices from 660, 661, 662, 663, and 664 trading days earlier.

Since that Report, the gold stocks basically just went down. That HUI 442 index “buy” signal had missed marking yet another high by just one day (the short-term high was on 4/27/12). The decline continued into the next long-term index, the HUI’s 663 index buy signal that executed on 5/08/12. The 663 index is the long-term equivalent of the regular system’s 16-20 index: It buys on declines and sells on rises. That buy signal was XXed Out (of questionable validity/profitability) because it came immediately after a higher index sell signal (a HUI 442 index sell signal on 5/04/12). Nonetheless, that 663 index buy signal marked yet another short-term low as the next day was a traditionally bullish “key reversal higher” (a lower low than the prior day and then a close above the prior day’s high). The gold stocks rose again the following day. That brief rise was enough to move the 663 index towards a resistance sell signal, as the HUI rose over some of the index’s back prices. And then the gold stocks “plunged” once again to new lows on 5/16/12.

The rises on Thursday and Friday of last week (5/17/12 - 5/18/12) appeared to cause a lot of hope that THE major low in the gold stocks had occurred. Over the past month, I’ve described the situation to subscribers as an apparently bearish “Slope of Hope”. That term is used to describe market sentiment during a continuing decline, as each brief rise fosters hope that the downtrend has ended. It’s the opposite of the bullish “Wall of Worry”, whereby the market keeps rising despite concerns that a major high is forming. My reading of analysts’ sentiment, as well as my own sentiment, was that almost everyone was describing how the gold stocks were extraordinarily oversold and would be much higher in the future. How many bearish gold stock articles have there been on the 321gold website during the past 6 weeks? Basically almost zero. But after each decline into index signals, the gold stocks would simply rise for a few days into long-term index resistance and then decline sharply to new lows, over and over again, despite reports that the vast majority of investors were so bearish that it “had to be a bottom”.

The rise at the end of last week once again hit the HUI’s 663 index’s resistance. 663 trading days ago was a low 10/01/2009. The HUI was at 418.65, 397.53, 394.74, 410.37, and 439.08, as per the five 663 index’s back prices. This past Friday (5/18/12), the HUI closed at 396.42, thereby going over one of the index’s five prices and hitting resistance again. The difference this time around is that the index’s resistance prices will be rising to the HUI 440 area. Therefore, resistance IS rising here. However, for the past few months, I’ve noted that if USERX declines through its 663 index buy signal on 3/20/12, the final target may be the last long-term index that I have, the USERX 884 index. It’s the lowest line in the following SKI index chart. By the way, those 884 index back prices are just now rising from the 2008 crash low…

Conclusion

Last week’s rebound in the gold stocks has once again fostered hope (including mine) that this major decline (since December 2010 in USERX) has bottomed. But the rise has simply hit/touched long-term index resistance again on Friday. Since that resistance is now rising for a few weeks, I’m not going to tell you that I “know” that prices are going to decline yet again. If prices do rise for a few weeks, index resistances would be hit and major buy signals would be triggered on a several-week decline to a probable higher low. I’d love that. But remember that SLV is still on its Death Run top from 14 months ago, as I wrote for these Reports at that time. I have not previously disclosed this, but GDXJ had a Death Run top (1 Down, 2 Up, and 5 or more hard down days) at the exact September 2011 high, and Apple (AAPL) manifested a Death Run top in April 2012 at its exact multi-year high. If prices do decline again here, the target is likely to be the 884 index, which marked the exact low in the October 2008 crash. I don’t know if we’ll get Life Run low run patterns on all of these measures before the major bottom occurs because measures like SLV and GDXJ haven’t been around long enough to have an adequate history. USERX (and HUI and GDX) have NOT had Death Run tops. Therefore, Jeff remains extremely long-term bullish and the long-term SKI System remains on its recent buy signal. I continue to hold my long-term core positions, but I cannot yet state that last week was THE long-intermediate-term low in the gold stocks.

Best Wishes, Jeff

If you are interested in following and learning more about the SKI indices, I'll write another Report 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 and a managed gold futures program. 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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