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Special SKI Report #22

Jeffrey M. Kern, Ph.D.

USERX | historicals
Written Sunday, Jun 24, 2007
Published Jun 25, 2007

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 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:

It's been a little more than 13 months since the May 2006 high in the gold stocks and they continue to meander. It's as if both gold AND the general stock market need to rise in order for the gold stocks to plod higher (as a broad group). The prior SKI Report on June 3rd, 2007, described a technical situation in which the master 92-96 index had bought on the exact low of 5/24/07. That was consistent with the beginning of a true ski bull market, but caveats were described (like most writers do) that argued against a true bull market at that time despite the buy signal at the low. The primary caveat that I've 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". So personally, I avoided buying that last buy signal because I'm rather chicken when there is a meaningful "caveat". At first the market rose off of that buy signal and I was berating myself for having avoided buying with my own monies.

Then, in the last three weeks the gold stocks declined enough to sell the 92-96 index and remove (as of now) the chance that a true bull market had begun. The 92-96 index, after having bought at the low on 5/24/07, generated its sell signal on 6/11/07. Remember, the signal is generated a day before it is executed. Therefore, that 92-96 index sell signal executed on 6/12/07, as the gold stocks, gold bullion, and the general stock market experienced strong down closes. AND QUITE SURPRISINGLY, THAT SIGNAL HAS ALSO MARKED THE LOW TO-DATE. So far, that buy signal that bought at the low, also sold at the next low! MOST STRANGE. The indices mark the critical points, as usual, but the market has been whipsawing so much that it keeps generating index signals that are difficult to interpret.

After that low on 6/12/07, the gold stocks rose for 5 consecutive days (weakly; averaging 1% a day) to just barely generate yet another SKI index signal! That was the 16-20 index sell signal that indicates short-term overbought conditions. In the past few days, prices have declined approximately 1.5%.

A short to intermediate-term SKI index may generate a true buy signal before the end of this coming week (by 5/29/07). Note the word "MAY" in the last sentence. Although by SKI definition, the gold stocks are not yet again in a true bull market (where prices go higher and higher and settle at a new level), SKI may be going long for several weeks to several months. If the buy signal occurs, we'll have to see what the next ski indices' signals are in several weeks to several months. A buy signal for a few weeks or a few months is not antagonistic to the idea that there will still be another significant decline (a "life run") to lower levels before the start of the next one-to-two year great bull in the precious metals.

I've copied (below) a little "fun" section from a recent SKI Update. Perhaps it will be educational and/or entertaining. It describes how the market and I acted after an index signal that occurred approximately 20 years ago. Note the volatility of the gold stocks back then and be aware that such volatility will return (seriously, be careful).

"I believe it was the summer of 1985 or 1986 and the gold stocks had been declining for months. All indices were on sells (like now). The market then rose to a 16-20 index sell signal at USERX 3.45. Therefore, prices would either decline to a true 16-20 index buy signal or rise to a 35-39 index buy signal. Prices declined day after day and the 16-20 index did buy at 2.96. Prices had declined to USERX 2.94 several times in the prior 5 years. Therefore, a break below 2.94 looked to be a true disaster to the downside.

So Jeff and his colleague bought that true buy signal at 2.96 (good discipline!). The next day prices declined and appeared to be below 2.94. Anxiety time. But USERX somehow closed exactly at 2.94. Saved for the day. The next day, prices opened lower and stayed slightly lower all day. All of the gold stocks were down, but somehow, USERX (the mutual fund) closed up a penny! The next day, everything was down, but USERX mysteriously closed up another penny. That exact pattern continued for a total of five consecutive days and I was nauseous every day, but somehow I held on. The market then went up and down a little for another 13 trading days. I was sitting at about a 5% profit by withstanding all of that pain, but the 16-20 index had now generated its sell signal and the 35-39 index would generate its "buy" signal the next day. So it looked like a small winner after sitting through 18 trading days of pain.

On the 19th day, the day of execution for the 16-20 index sell signal, the gold stocks rose 10+%!!!! My colleague and I said, "The 16-20 index is executing its sell, we've had enough pain, so let's sell and take our 17% profit for the month". We sold and USERX did its typical "one-penny thing" by closing 1 penny over the prior high of 3.45 (it closed at 3.46, a break-out?). The next day was the day of the 35-39 index buy signal. Prices rose another 10+% that day too! After waiting through 18 days of misery, we sold and took our 17% profit only to see another 10% rise the day after we sold (a 20% rise in two days)! That 35-39 index buy signal stopped the rise and prices fell 10% over 3 days, back to (you guessed it) the break-out point at 3.46. So we bought back and prices then rose back up 10% (we sold) before declining and rising and declining, up and down, for several months."

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 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.

Best wishes,

Written Sunday, June 24, 2007

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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

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