Don't Change the Channel

PMtrader
October 18, 2004

Caveats:
In the continuing research into the ebb and flow of the markets, please be reminded - the markets are simply a study in probability.

If you haven't read, The HUI - A New Bullish Phase, you may wish to read it now, as the discussion below builds directly on its foundations.

The author remains long gold and silver.

Let's Dive In:
The referenced paper made what some might consider to be a bold call, which at the time contradicted the mindset produced from the dog days of summer (and in fact since January of 2004) - the call was for a new bullish phase in the HUI, so let's see how we did. The chart below highlights the data point in time when the paper was written. It was the second of two consecutive "black candle" days - certainly a locally pessimistic time to be making a bullish call. As to the accuracy of the call, let's let the subsequent data below speak to that, and move on with a more detailed discussion of the data itself.

The blue line above identifies what appears to be the bottom of the most important intermediate term trend channel for the HUI - with about a .75 slope. I.e. Each day, the bottom of the HUI's support value increases by .75 units. The first three green circles - counting from left to right - are what were used to identify the trend channel. The subsequent three green circles represent further tests and refinements of the initial assumption.

Now consider the three yellow lines. These represent three of the more important short term and more aggressive trends, within the intermediate channel. Notice that these "steep trends" are short-lived. When the resistance is broken, as shown by the three red circles, a fall to the intermediate trend support - the blue line - invariably results.

There are a couple of conclusions to draw from the preceding analysis. First, be aware that steep trends within a bullish move are usually broken, often dramatically - which correspondingly leads to unwarranted pessimism. The latter idea is often concisely referred to as a "headfake" - at least by this author. Second, how should the action in the HUI for this past week be characterized in the context of the intermediate trend?

Well ... let's see. In the first three days, we plunged to successfully test the bottom of the "blue" line. This was followed by a single day of consolidation on Thursday. Then on Friday, the HUI put in a strong white candle day - bouncing strongly off of support. Overall, it appears to have been a very constructive week in the HUI, likely setting the foundation for increased strength.

So, until the market says otherwise, I for one won't change the channel.

Aside: Some may wonder how the three leftmost circles in the plot above, led to a bullish call in and of themselves back in early September. They didn't. There was a more global consideration - they just supplied the details. In fact, this global consideration has already been discussed in a prior editorial - The HUI Spread - So far, So good.

October 17, 2004
Terry L. Krohn
PMtrader
email: PMtrader

A Personal Note Jun 2006

Many thanks to readers of Eye of the Pyramid!

Axiom House is running a great special starting June 6 and running all day June 7. You can check it out at the link below. GATA will receive a $2 donation for every book purchased by a member.

http://www.axiomhouse.com/offers/bonuspage.htm

Eye of the Pyramid can also be purchased at Amazon.

About Terry L. Krohn
 
Mr. Krohn is a research scientist living in the Washington D.C. area.

His field of expertise is scattering physics - the analysis of interactions between electro-magnetic waves and matter.

Copyright © 2004 by Author - Reproduced with Permission.

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