Special SKI Report #21
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 32 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.
The prior SKI Report on May 13th 2007, reported that prices were at a critical juncture: A small price rise at that time would have generated a true bull market as defined by the SKI indices. However, based upon other information, it was expected that prices would decline and avoid that bull market buy signal. And prices clearly declined over the three weeks subsequent to that last report, but late last week (i.e., 5/31/07 and 6/01/07), the gold stocks and the precious metals surged higher. Was that the beginning of the next true SKI bull market phase and the final low-point in the sideways movement that has frustrated many gold stock investors for the past year (including me as I sat around in cash or recommended short positions for more aggressive folks)?
As I've described many times before, true bull market periods (where prices rise and rise and settle at a substantially higher level) are defined as 92-96 index buy signals that are on the SKI Path. A mere rise above the prices from 92-96 trading days earlier does NOT mean it's a true SKI bull. Nature is more complicated than simple moving averages. True bull market phases have ALWAYS (yes, that IS "always") required special SKI index set-ups. The special set-up requires that prices rise over the prices from 96, 95, 94, 93, and 92 trading days earlier (to generate a 92-96 index buy signal), then prices fall below the prices from 92-96 days earlier, and then rise back above the 92-96 back prices.
At the prior Report, prices HAD risen above the back prices AND then fallen below them. The start of a bull market was awaiting a rise back over those back prices. It did NOT happen because prices declined as expected. BUT SOMETHING ELSE THAT IS QUITE SPECIAL DID HAPPEN: Instead of rising over the prices from 92-96 trading days earlier, on 5/23/07 the market did not FALL fast enough and the prices from 92-96 days earlier (from the January 2007 bottom) fell UNDER the current prices. Therefore, on 5/23/07, the 92-96 index generated its buy signal marking a potential 95-day cycle low. Buy signals are generated a day before they are to be executed so that one always obtains one day's warning before executing the index signal.
The master SKI index therefore bought at the close of 5/24/07. I often write that the indices and/or run patterns are supposed to buy within one day of the low. Prices declined significantly on 5/24/07 and USERX (the gold mutual fund) closed at 14.87. THAT HAS BEEN, TO DATE, THE LOW CLOSING PRICE. The market then came within one day of generating a rapid master 92-96 index SELL signal last Tuesday-Wednesday (5/29/07-5/30/07). The 92-96 index came very close to selling. Technically, the market needed to rise immediately to avoid the sell signal. IT DID IT! It rose on cue. As a pure technician, I would have to say that the announcement of decreased central bank gold sales over the next few months was timed perfectly to maintain the buy signal from a week earlier (smile)!
So, has the bull returned? SKI is on its master 92-96 index buy signal and the gold stocks appear to have completed an ABCDE Elliot wave corrective triangle that started in early December 2006. There are no guarantees. That Elliot Wave triangle appears to have bottomed, but after a rise, there is no guarantee that prices cannot fall through the bottom of the triangle and initiate a major decline down to longer-term support at USERX 10.86 and $540 gold. There also is no guarantee that the 92-96 index will not sell. Prices MUST continue to rise over the next few weeks to avoid a 92-96 index sell signal that should prove to be quite bearish, should it occur.
Perhaps I am part of the required "wall of worry" during bull markets, but I am skeptical for several reasons. The one that I've repeatedly written about for one year is the "death run" pattern that occurred at the top in May 2006. That "death run" predicted a major decline that should be completed via a "life run" plunge. And the "life run" should provide a buy signal within one day of the final low. The market has not, as yet, provided that "life run". Furthermore, confirmation of the true bull has not yet been obtained via other SKI indices.
To conclude, this SKI bull signal is precarious and requires continuously higher prices so as to stay perfectly above the rising back prices from 92-96 trading days ago. Prices need to follow those 92-96 index back prices higher in an exact mathematical manner or the market will experience a significant decline. I believe that the last sentence reads as an un-hedged statement. Therefore, it is important to maintain a stop loss (actually now a "stop gain") and I am adamant that a 92-96 index sell signal is the correct stop on long positions (and a likely point to go short for more aggressive folks). Unless and until that happens, SKI will remain on a 92-96 index buy signal.
Surprised that the persistently bearish SKI has finally recommended closing short positions and suggested long positions on 5/24/07 using a 92-96 index sell stop? 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. 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.