Sunday, April 15, 2007

Three cheers for HUI

Both gold and gold equities tend to take three or four attempts at a significant resistance level before finally overcoming it. The Amex gold bugs index (HUI) kept to that script. On Friday it closed at 364.47, clearly above the 362 resistance level established in December and February. To say this level is obvious is like saying the guy in the CountryWide commercial is wearing too much make-up The natural question is, “what now?”

If we look further back, there was another peak at 369.38 established last September. For now I’m expecting it to be taken out partially because of the breakdown in the USD. The dollar index closed below the December low that followed a precipitous drop last Thanksgiving. At the time I thought the H&S pattern was forecasting a dollar index of 75 or so. Even before then, a breakdown below 80 would have serious consequences.

Since I plan to sit tight with my PM positions, I find it far more interesting to ponder what might happen to the general stock market. All major indices showed nary a concern on Friday as they rallied nearly half a percent. Emerging markets were even stronger with EWZ (iShares Brazil ETF) gaining 2.3%. If we have an orderly decline in the dollar, we could have a replay of 2003 when everything but the USD went up. Of course, a lot hinges on Fed rate cuts. With hands tied by inflation in the pipeline they appear destined to be behind the curve, again. What should worry stock market bulls at this moment is the action in the bond market. I showed a chart of TLT a couple of days back. It has broken below its 50 dma and is heading towards the 200 dma. I don’t think this economy can withstand the shock of higher rates. Worse yet, it could be signaling a liquidity contraction.