Special SKI Report #78
Gold Stock Update

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Oct 31, 2010
Published Nov 1, 2010

Current USERX price = 19.42, Up 13 cents (.6%) 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:

In the last gold stock SKI Report written on Sunday 10/10/10, I described how the intermediate-term rise from the summer low had reached its historical minimum duration and how any decline would yield another 663 index buy signal. That 663 index is the long-term equivalent to the 16-20 index that buys on declines. Despite the fact that it uses prices from a long time ago (660-664 trading days earlier), it is a short-term index. Since its back prices were rising to the March 2008 highs, any brief decline would fall below those rising back prices and generate another 663 index buy signal. The “bad” thing about getting such a buy would be that the expected subsequent rise would yield another sell signal. I also wrote that the gold stocks have always corrected down to the 16-20 index and 35-39 indices.

After that report, the gold stocks continued to rise a little into 10/1310 and stayed ahead of those rising 663 index back prices. On Thursday (10/14/10) the gold stocks declined enough for USERX to just touch the highest of the 663 index back prices. That started moving the index towards a buy signal (that always takes at least 3 trading days to generate). On Friday (10/15/10), the small decline fell below 3 of the 663 index’s back prices and a buy was getting closer. On Monday (10/18/10), the gold stocks declined a fraction more and remained below 3 of 5 index back prices.

We were within a day of generating a 663 index buy. Such buy signals occur on declines. So when gold bullion (that’s the current month on the COMEX gold futures contract) closed 10 cents higher as the gold stocks came to within one day of generating a 663 index buy signal, I had to send the following message:

“(10/18/10) I have not written about a divergence in gold vs. USERX for weeks because it did not appear to be relevant. Today's divergence may be relevant particularly because of that 10-cent rise in gold on the close. I have never kept the statistics on such a divergence, but I believe that it's about 67% correct (meaning short-term bearish) and that 10-cent rise in gold just rings my alarm bells. SKI-wise, the 663 index continues to break towards its buy signal. A DECLINE TO BELOW USERX 19.35 TOMORROW WILL GENERATE THE SHORT-TERM (1-2 WEEK) BUY SIGNAL. The run pattern is 1 Up and 3 Down. That's a slightly bearish continuation probability. Short-term traders would like to see prices continue in a run down to 4 or 5 (or more) days into the index buy signal because that increases the odds of a short-term low.

Conclusion:

The positive/bullish thing about today was that gold bullion dropped sharply in the morning to close last week's up-gap (expected to occur at some time here) and that the gold stocks are sitting at 663 index support, but today rings a little alarm bell in Jeff's subjective head due to a 10-cent up close in gold while USERX declined. LOOK FOR A QUICK PLUNGE INTO A 663 INDEX BUY SIGNAL ON (hopefully) A RUN DOWN OF 4 OR MORE DAYS AS A REASONABLE SHORT-TERM BUY. The 663 index will generate a buy signal tomorrow for execution on Wednesday if USERX can just drop 11 cents tomorrow, but I won't be surprised if USERX drops below 18.99 (the low on 10/07/10) before it bottoms if this baby is going to set up a good short-term low.”

The next day (10/19/10), the gold sector did it’s mini-plunge. I can’t make those kind of accurate short-term forecasts even once a month, but that one was “ringing the alarm bell”. The 5% one-day drop in the gold stocks and the $36 drop in gold bullion therefore generated the next 663 index buy signal.

But remember, the gold stocks always correct back to the 16-20 index and that had not yet happened. It actually took a few more days of sideways movement. The 16-20 index generated its short-term buy signal on 10/22/10 as the gold stocks fell below the price from 16-20 trading days earlier.

But hey, didn’t Jeff also write that prices should decline to the 35-39 index? Yes, I did, but I should have been explicit. History shows that declines should go down to the 35-39 index as well as the 16-20 index. If the correction does not go down far enough (i.e., down to the 35-39 index), the ensuing rise in the precious metals has been a large intermediate-term blow-off move that ends the bull market for at least a year and usually longer. I was and am expecting a continuing multi-year rise because everything SKI has is simply long-term bullish. So I didn’t describe such a scenario that could end a bull market.

What was expected was a rise from the short-term 663 index and 16-20 index buy signals and then a decline into the 35-39 index. We’ve gotten a rise at the end of last week and those indices are set to sell within a few days. Those signals will pretty much coincide with “Fed Day” (11/03/10; when the U.S. Federal Reserve makes its next announcement and everyone is interested in seeing how much additional quantitative easing will occur). But that has been my favored intermediate-term scenario for over a month to subscribers: A quick hard drop to index buy signals and then a rise that generates short-term index sell signals around “Fed Day”.

The 663 index WILL generate its sell signal this week even if prices decline because its back prices are in the process of plunging down from the exact March 2008 highs. And if the current price is higher than the back prices, that’s what generates a sell signal. Perhaps more importantly, those back prices will be heading down for a year. The SKI long-term system is going to give its last signal for probably another 3+ years! That implies that we are finally completing the process that started at the death run of May 2006: The long-term for the gold stocks will soon have significant upside potential as those long-term SKI indices will all be on buy signals and the resistance from those long-term cycles will be “gone”. Don’t ask me why or how these indices works like this, I’m just an empiricist.

But we still have not corrected enough to involve the 35-39 index (although when one applies the SKI indices to the HUI index, as opposed to USERX, last Wednesday’s intra-day low just touched the 35-39 index by .03!). Therefore, I cannot tell you that this week’s short-term sell signals will definitively stop this short-term rise. This could be the start of a multi-month blow-off top (according to historical precedent), but hopefully, the goldies will correct one more time down to the 35-39 index before the next large intermediate-term rise starts.

Cheers, 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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