Current USERX price = 14.93, Down 12.5% 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 www.321gold.com. 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 36 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.
In the last gold stock SKI Report on 7/12/08, I described how the SKI indices had generated sell signals. I had gone short with 10% of my personal account (I devote almost 100% of my non-retirement funds to the gold stocks; my retirement funds cannot be traded) via SPPIX (a short gold stocks mutual funds at www.profunds.com). The gold stocks continued higher the following day (Monday, 7/14/08), directly into the 35-39 index back prices. If prices rose for another day, the 35-39 index would be generating its true SKI buy signal and I would have been stopped out for a small loss. And then on Tuesday (7/14/08) gold rose $14 and the gold stocks were surging higher in the morning. Since SKI deals with closing prices, there was nothing that I could do but sweat and go out to clean my pool. By the time I returned to the computer screen an hour later, the gold stocks were falling and then they were plunging. PRICES HAD RISEN DIRECTLY INTO THE 35-39 INDEX RESISTANCE AND WERE BEING REPELLED, so I doubled up on my short position at the end of that day.
The nice aspect of that ongoing shorting trade/investment was the fact that the 35-39 index back prices were declining each day. That meant that my buy-stop was declining and the risk was decreasing every day. Somehow, that's how many of the SKI index trades set-up: the risk is known and the stop automatically changes every day as the index back prices change every day. I don't know why nature works that way. So life appeared to be simple and easy as the gold stocks simply declined each day for the rest of the week to avoid the SKI-voodoo empirical indices.
But the market is rarely consistently "easy or simple"; especially the volatile gold stocks. On the following Monday (7/21/08), the gold stocks rose about 2.5% with USERX closing at 16.91. What were the 35-39 index back prices on that day? They were 17.46, 16.97, 17.12, 16.70, and 16.88. Notice how the current price had risen back up to hit/touch/break the 35-39 index back prices once again. But it takes a few days to generate a SKI index signal and prices usually have to go over all 5 of those back prices. So we were back up into that declining index resistance line. And then the gold stocks began another plunge!
This time the decline into 7/25/08 reached USERX 15.58 and generated a SKI 16-20 index oversold buy signal. The decline had brought prices into a support level but this index buy signal (the 16-20 index is a contrary index, like an oscillator; as prices fall, it buys, and as prices rise, it sells) was, according to the SKI System rules, "XXed Out". The "XXing Out" rules are explicitly and objectively described, in just two sentences, in the 4th paragraph of the website article technical description section of "About SKI" at http://www.skigoldstocks.com/about.php: "A 16-20 buy signal is XXed Out if it immediately follows a 35-39 index or 92-96 index sell signal". And as the prior 321gold Special Report described, we had just obtained a 35-39 index sell signal. So the gold stocks were oversold, but I (and the subscribers) were just supposed to remain short the gold stocks.
Even more importantly and interestingly, the SKI long-term index system was coming into the picture. This separate set of three indices is composed of the 218-222, 439-443, and 660-664 indices. In other words, we are comparing the current price to the prices from hundreds of trading days earlier (actually years earlier). Sharefin's excellent free SKI graph (see http://www.sharelynx.com/chartstemp/SKI-Global-Sentiment.php) does not include those long-term indices, so I'll provide a one-time view from a master SKI subscriber: http://img222.imageshack.us/img222/6109/screenhunter457th2.jpg. Prices continued down, as expected, to execute a major 218-222 index sell signal on 7/29/08 at USERX 15.40.
I've been pointing to USERX 15.54 as a major technical point for months because it was the prior intermediate-term low on 4/29/08. That 15.54 was, in my SKI-view, the right shoulder of a major head-and-shoulders topping formation from 2007 to 2008. The left shoulder of the formation was the 12/20/08 USERX low of 14.75 when U.S. Global Investors gave out its $2.43 "crazy" dividend. The expectation was that whenever USERX closed below 15.54, it would instantaneously plunge to that 14.75.
And that's what happened last week as the 218-222 index marked the day of the breakdown on 7/29/08 and then prices plunged the following morning to approximate an intra-day low around 14.75. And then the buyers came in to push prices higher for the day! It looked like a bullish reversal and I then decided to exercise prudence and cover my short position (i.e., sell SPPIX) at the close of the following day (7/30/08). Once again, prices rose in the morning of 7/30/08 and then, thankfully, closed lower as I covered the short position. But SKI is based upon closing prices, so the gold stocks plunged again on this past Friday (8/01/08), closing at USERX 14.93, to smash the 439-443 index whose back prices were USERX 15.03, 14.97, 15.06, 15.27, and 15.21.
I (Jeff) closed my short position on 7/31/08 for an 11.5% profit over 3 weeks to provide the fifth profitable transaction out of the five gold stock transactions in 2008. Since I am so risk-averse and have taken less than 100% positions in some of these buys/sells, the investment account is only ahead 20+% in 2008 while being in the market for about 11 weeks of this year.
Now SKI will/should generate the 439-443 index sell signal early this week for a double sell pattern. I am in cash, but I am expecting a rise into at least the end of this week (yes, I do not know if prices will fall below USERX 14.75 on Monday, 8/04/08, or begin to rise), but the expectation is for a short-term rise into SKI index signals and then the start of another decline. I am looking to re-initiate a short position on such a rise, but I do not risk my money based upon my "expectations". I patiently wait until the indices and/or run patterns provide low risk, high probability entry points, with a clear stop loss (and reverse) point, and I try to execute with discipline. So I am not allowed to be buying here due to the risk.
The ratio between the XAU, HUI, and/or USERX with gold bullion is at an historical low, a technical area that has repeatedly yielded large gold stock rises over the past 7 years. Moreover, as the bullish writers are emphasizing recently, the precious metals usually make their lows in the summer time, and then demonstrate historical seasonal strength as September begins. I am not allowed to risk my money based upon such tendencies, but SKI could turn bullish before the end of August if prices can rise enough to generate a 16-20 index sell signal and then fall into the end of August into a true SKI 16-20 index buy signal. DO NOT INVEST BASED UPON MY EXPECTATIONS. Only use the index signals and run patterns that are currently bearish but are significantly oversold. The great SKI life run low, the second major entry point of this decade is expected on a great decline into this Fall/early Winter, but that's just my expectation based upon the indices. We've been on a death run as of the May 2006 high, so I am not surprised that many gold stock investors are nursing losses or frustrations. And I do expect that prices will eventually decline into the final SKI index, the 660-664 index (the green line: http://img222.imageshack.us/img222/6109/screenhunter457th2.jpg). But when/if the life run low occurs, I'll be the most bullish SKIer you can imagine as I expect to buy within a day of the final low. Again, that's an expectation, and is not actionable until/if it occurs.
Best wishes, 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.