Special SKI Report #83
The New Gold Stock Phase Continues

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Feb 13, 2011
Published Feb 14, 2011

Current USERX price = 17.85, Up 50 cents (3%) since the 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 1/23/11, I described how the gold stocks were likely to be entering a “new phase” because any further decline during the early part of the following week would generate a master 92-96 index sell signal.

That decline occurred and the prior Report stated that “A 92-96 index sell signal will sell the mechanical SKI system at its profit for safety, but it truly can mark an important low. But it isn’t a buy signal, and such a sell signal, even if it marks a low, will indicate that subsequent index signals on rises will be marking resistances/highs. It would take a few months of rises, declines, and rises to set up the next major 92-96 index buy signal”.

The declines on 1/24/11 and 1/25/11 yielded 5 consecutive daily declines in the gold stocks into the 92-96 index sell signal. Therefore, as per the prior Report, the odds were that it was a low and I bought another 25% and some gold at $1328 during the morning of 1/26/11. But again, the 92-96 index sell signal was supposed to herald a “new phase” in the gold stocks that would be marked by rises into resistances.

The rise from 1/25/11 hit the first resistance level last Tuesday (2/08/11) when prices finally rose enough to hit/touch the 16-20 index resistance. Historically, the market will hit that resistance and go through it to the upside two-thirds of the time, rising into the next level of index resistance (the 35-39 or 92-96 index resistance). But the next day (2/09/11) was technically bearish: The gold stocks manifested a “key reversal to the downside” (rising to a higher high than the prior day and then closing below the prior day’s low). Furthermore, there was a negative divergence between the gold stocks and gold bullion: The gold stocks fell 1.6% while COMEX cash gold rose $1.40. There have been five such negative divergences since the 12/07/10 intermediate-term high and the first four of those divergences were “correctly” bearish (such divergences are not 100% correct!).

I write these Special Reports for 321gold on a set schedule, every 3 weeks. I do so to advertise my services and to provide a continuing service to precious metals investors (a “service” that I have enjoyed providing for more than 10 years on 321gold). I wish that I could wait one more day to write this Report because what happens tomorrow (2/14/11) will have a significant impact on the SKI indices.

We’ve risen into the first resistance, but unlike many analysts, I am not going to confidently predict what will occur at this point. The indices do allow me to state a number of “IFs” that are dependent upon the market behavior on this coming Monday (2/14/11).

1. If prices rise tomorrow, rising to close over USERX 17.89, the 16-20 index sell signal will actually be generated. That’s important because any subsequent decline to a 16-20 index buy signal will then generate a true SKI System 16-20 index buy signal. That would occur even (and especially) if the gold stocks declined to a new low (below the 1/25/11 low). Such a sell signal would also allow for a decline into a higher low (above the 1/25/11 low) in March that would provide a 16-20 index buy signal coupled with a new 35-39 index buy signal. That would be a Double Buy index pattern that would cause Jeff to go to 100% long AND use leverage to increase the long position.

2. If prices decline tomorrow to below USERX 17.35 (that’s about a 3% decline), the 16-20 index sell signal will be clearly avoided. That would prevent us from obtaining a new 16-20 index buy signal (the index has to generate a sell signal before it can generate a new buy signal). Essentially, the gold stocks would be falling into an “abyss” and the SKI indices would not provide an index signal to mark a low. Rises over the next month would be rising into new index resistance again.

3. A small decline tomorrow would be the least “clear” situation and conclusions would need to await further market behavior. For example, a small decline tomorrow, followed by a couple of days of rising prices would still generate the 16-20 index sell signal and the conclusion would be #1 above.

Conclusion:

The expected rise from 1/25/11 occurred, but the precious metals hit index resistance last Tuesday/Wednesday. Despite the very bearish market behavior last Wednesday (2/09/11), the up-trend channel from the 1/25/11 low is still intact as of today. A rise tomorrow (2/14/11) will set up bullish index buy signals on a decline over the next few weeks (possibly waiting until about the 3rd week of March), but a hard decline tomorrow would prevent SKI from obtaining buy signals on such a continuing decline. I wrote in October about a decline in gold bullion back to its breakout level of around $1260. Lots of analysts are now expecting such a decline, and it may occur, but the gold stocks have already corrected back to their breakout level (e.g., HUI 500) back on 1/25/11.

Despite the possibility of a hard decline, right now, without index buy signals awaiting below, I continue to adamantly disagree with analysts who are projecting a major bear market from the December 2010 high. SKI turned multi-year bearish in May 2006 (despite catching some of the rise in late 2007 through March 2008). The indices provided a major Double Sell on 3/17/2008 and then turned multi-year bullish on 9/11/2008 (too early but buying gold at $740 was not “bad”). I continue to adamantly report that the multi-year up-trend from the low in 2008 is intact in the gold stocks because the December 2010 high did not provide the multi-year topping/bearish patterns that have occurred in 2006, 1996, 1983, or 1980. Therefore, we should/will obtain major new index buy signals as this “new phase” is completing.

Please note that in 3 weeks from now, I’ll be hiking and rafting in New Zealand (smile) with my eldest son who is completing part of his ER residency in Napier. Therefore, the next SKI Report may come a little early or late, depending upon internet and travel issues.

Best Wishes, Jeff

P.S. And yes, as per the prior Report, one still has to be concerned about a meaningful general stock market decline as that market just continues to grind higher under overbought conditions.

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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