Sunday, February 15, 2009

HUI Gold Bugs Index

Or $HUI, is the favored index for gold bugs because it consists only of unhedged gold miners, who can benefit immediately from increased gold mining margins as they occur. You cannot buy the $HUI, but there is an ETF with ticker GDX that allows retail investors to get in on the gold mining sector and eliminate company-specific risk.

I was looking at stocks yesterday and tried my hand at Elliott Wave on the $HUI chart. I believe gold stocks (as a sector - of course, every individual stock is different) and the gold price are both due for a quick plunge before a spurt higher into spring.

If you're not into Elliott Wave, this stuff seems like voodoo and sometimes it is. It can be helpful at times when trying to figure out what may come next. Like most technical analysis tools, it must be used in conjunction with other analyses to improve a trader's odds, is not a magic crystal ball that always works and requires flexibility (i.e., must be willing to change wave counts if new price action dictates).

Anyhoo, below are my favored (top chart) and alternate (lower chart) wave counts on the $HUI action since the fall lows. Keep in mind that I am NOT a wave expert:

Either way, I remain short a few gold miners as a short-term trade and would wait to establish any new long/bullish bets in the gold patch. I like the first count better for a few reasons:

1. I believe the action since the end of December of 2008 has burned a lot of time without any progress (typical of a corrective phase) and a complex wave IV that takes 2 months would build a perfect set-up and base to allow a quick 4-8 week explosion higher (i.e. 50% gains or more from lows near the end of this month) in a wave V move to end this leg up of the new cyclical gold stock bull market.

2. It would fit better with the general stock market indices (e.g., S&P 500), which have been correcting since the first week of January. Gold stocks are not immune to general market forces. Remember, I am also anticipating a re-test of the panic November lows in the S&P 500 as a bear trap to end the month (to be followed by a rapid, high-powered bear market rally out into the spring).

3. Gold stocks have underperformed the gold price, as the $HUI has made no net progress since December 17th, while the gold price has moved to higher highs since this date. This is not bullish mining stock action and is more typical for a corrective phase.

Once gold stocks take one more quick plunge, which I anticipate will take about 2 weeks or so, I will be betting the farm on gold stocks by buying call options.

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