Saturday, December 09, 2006

HUI fractals

Since the last time I wrote about the PM sector, the HUI has gone from about 353 to 364 and now back to 345. I have taken the most recent drop in stride, as I view this action based on the framework of Elliott wave fractals. By the way, here’s a tutorial on Elliott wave theory (It’s free but you do need to sign up. The tutorial has 10 parts and is not something you can go through in one sitting.)

My wave count on the HUI is identical to that of Martin Goldberg at Financial Sense Online, the salient points being:

  • The HUI is reckoned to have entered wave III in May 2005 from HUI = 165.71.
  • Wave 1 of III ended in May 2006 at HUI = 401.69.
  • Wave 2 of III (the most recent correction) took the form of an ABC that ended in October at HUI = 274.72.
  • The above is not a trivial statement as it implies that we have entered the fabled wave 3 of III, the most sustained and powerful part of the bull market advance.

The chart above shows the HUI from May 2005 to present. Shown also are the Fibonacci levels of wave 1 of III in blue, wave (1) of 1 of III in cyan, and the dominant trend lines in dark green. In plotting the Fibonacci levels of the current wave also in cyan, I’m exploring the possible similarities (fractals) of waves (1) of 1 of III and (1) of 3 of III. So far, there are plenty of parallels in the run up to the 61.8% level, pull back, another run to the 50% level and retest of the 61.8% level. Complete similarity would call for some basing action around here before assailing the next level around 364. Of course, that may be too much too ask. At any rate, the current prices are more bullish with respect to the moving averages, to be expected as we emerge from a lower order correction.

As an exercise in fancy, we can make some forward projections. The Fibonacci levels of (1) of 3 of III calls for a target at HUI = 456. Note that wave (1) of 3 of III (with a gain ~ 61.8%) is larger than wave (1) of 1 of III (with a gain ~ 50%). The wave 3 of III has a target around 720. The corresponding gold spot price will almost certainly be over $1000 at that point.

Timing wise, so far wave (1) of 3 of III is progressing at half the pace of wave (1) of 1 of III, although I believe favorable seasonalities will accelerate its unfolding. There will be more clues as 2006 comes to an end. If the current pace continues, wave 3 of III will take 26 months, culminating after the 2008 presidential election (BTW, McCain over Hilary anyone?).

Again, I emphasize that this is just one view of the price action. Much hinges on whether we have already entered wave 3 of III. For example, a drop below the recent low of 312 would require a serious re-assessment of the technical picture.