Special SKI Report #40
Buys/Sells in Choppy Gold Stocks

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Jul 12, 2008
Published Jul 14, 2008

Current USERX price = 17.06, Up 4.6% since the last 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 on 6/21/08, I described how SKI was within a day or two of generating another buy signal and that would happen if prices could stay above the 35-39 index (the intermediate-term index) depicted in Sharefin's free SKI charts as the green line (see http://www.sharelynx.com/chartstemp/SKI-Global-Sentiment.php). But I also wrote that "Such a buy signal wouldn't be forecasting some great rise because it doesn't involve the most powerful index, the master 92-96 index. The probabilities favor that the buy would make a profit (75% probability; not extremely high) but the buy should get sold out within one month and it could happen much faster than that".

On the next trading day, Monday (6/23/08), gold plunged $16 and the gold stocks opened 2.5% lower. A decline of 2.5% was needed to AVOID that index buy signal, but then the gold stocks recovered and the index buy signal was generated for execution at the close of the next trading day. Therefore, SKI officially bought on 6/24/08 at USERX 16.22 as prices declined into the buy signal day.

That week was a very volatile period involving the 6/25/08 Federal Reserve meeting. It was also a most interesting week for the mechanical/mathematical SKI indices. I thought that a reprint of my review of that week would be interesting and informative:

"Monday (6/23/08): We needed a USERX decline of at least 2.5% to avoid the bullish 35-39 index buy signal. Gold plunged $30 in 10 minutes early in the morning for no apparent reason (except SKI?; sorry for that grandiose statement but it really "felt" that way to me). I was wondering if the gold stocks would follow. The gold stocks went down 2.5% immediately, but then spent the rest of the day rising and many gold indices closed meaningfully higher despite gold bullion's plunge. That's bullish and it even looked like USERX would close more than 2 pennies higher to break out over the critical 16.33. But it only rose 1 penny to remain below 16.33 (amazing). I sent a "Buy Update" because the 35-39 index buy signal was generated for execution at tomorrow's close.

Tuesday (6/24/08): Prices rose in the morning and USERX clearly appeared to be over 16.33. I sent the follow-up "Buy Update" in the morning because I had simply decided that I was going to mechanically buy on the index signal. The gold stocks then sold off and USERX closed down 10 cents at 16.22. I WAS WORRIED BY THAT CLOSE BELOW 16.33, BUT BY SIMPLY EXECUTING THE MECHANICAL BUY SIGNAL (but with only 25% of my capital in PMPIX), I FELT DISCIPLINED AND I DID WHAT I WAS SUPPOSED TO DO (whatever the eventual outcome). This is still the easiest strategy to follow.

Wednesday (6/25/08): Gold plunged $12 in the morning before the Federal Reserve announcement. The gold stocks were down 2%, falling below 4 of the 5 back prices in the 35-39 index. If prices stayed down there by the close on Wednesday and Thursday, the sell stop would have been hit and I'd have sent a "Sell Update". But I was completely calm and actually laughed at the market because I had executed with discipline and whatever would happen, would happen. One fellow called me (he doesn't have access to a computer during the day and pays me extra for personal calls) because he had not bought on the index signal the day earlier because he believed that prices would go down on this Wednesday. Why? Perhaps this is a useful addition to your market knowledge: He believes that gold bullion prices usually decline on the day that COMEX options on gold futures expire. That expiration occurred 45 minutes before the Federal Reserve announcement and GDX (an ETF basket of gold stocks) was down about 2%. So he had the chance to get back in synchrony with the mechanical buy at a 2% discount. I said, "Do it right now because they could close higher by the close if the index is correct". And so the Federal Reserve basically said and did nothing, gold and the gold stocks recovered, and USERX closed down by only 4 pennies at 16.18. Today was also "half-cycle" theory day, 10 trading days after that XXed Out 16-20 index buy signal. Thankfully, USERX was clearly closing above its critical price of 16.06 (bullish)!

Thursday (6/26/08): Prices exploded and USERX appeared to be 5-6% higher by the close. However, it only rose 3% and closed at 16.66. That was SKI-beautiful! First, it meant that people who bought that day didn't get too high of a price and that prices could continue to rise because the price wasn't "too high" relative to the indices. Second, the 35-39 index back prices were going to include a 16.65 the next day and prices were supposed to rise over 16.65. Therefore, that 16.66 did it again by one penny, suggesting that prices would rise on Friday.

Friday (6/27/08): Prices rose and I didn't have to watch the markets because SKI was done for the week on Thursday's rise. But I did have the urge to sell on this Friday. I refrained from doing that because I am supposed to wait for an index sell signal. USERX closed at 17.06."

That rise on Friday 6/27/08 caused prices to begin to rise over the 16-20 index's back prices (see the red line in Sharefin's graph). When prices rise over those back prices, it is a SKI short-term overbought sell signal. The next week, the week of 6/30-7/03/08, was another volatile and SKI-interesting experience, so I'm adding to your reading load and reprinting that week's review as well:

"Monday (6/30/08): The gold stocks rose 2% in the morning to hit the 92-96 index resistance at 17.39 and then fell 2% to hit 35-39 index support at 16.69. A rather volatile day that ended with a small rise to USERX 17.18. I wanted to sell on the open since it hit that known resistance but could not do so in the mutual fund PMPIX. The 16-20 index short-term overbought sell signal was generated as expected today for execution tomorrow. So I wrote to traders that I WAS selling and returning to cash. I made 12% in PMPIX in 5 trading days but only had a "chickenski" 25% invested.

Tuesday (7/01/08): Prices rose strongly into index execution day, but since Canada was closed, I expected that USERX's rise would be muted. Prices were rising again into that 92-96 index resistance, now at USERX 17.44.

Wednesday (7/02/08): Gold bullion rose a few dollars while the gold stocks experienced significant selling. The sell-off in some commodities stocks like the steels and the coals was very strong. Although USERX's decline to 17.07 was muted by Canada re-opening, THIS WAS A MOST BEARISH DAY. It was the opposite of 2 weeks ago (6/23/08), when gold fell $17 and the gold stocks rose a little to generate the 35-39 index buy signal. I wrote to traders that "gamblers" could initiate a short position in gold bullion as the European Central Bank made their announcement about raising their interest rates early tomorrow morning. Fundamentals suggest that raising the interest rates would send the U.S. Dollar plunging and gold soaring, but such a rate hike was widely expected and today was bearish for the precious metals.

Thursday (7/03/08): The rate hike occurred. Gold bullion fell. The gold stocks fell to their 35-39 index support at USERX 16.69 and then recovered to some degree. Support comes in on Monday 7/07/08 at USERX 16.79-16.80."

Conclusion:

So the 16-20 index sell signal marked the short-term high to the day on 7/01/08 and SKI sold. And then last week (7/07-7/11/08) prices declined to sell the 35-39 index on Thursday (7/10/08) before exploding 3-4% higher on this past Friday (7/11/08). SKI is on index sell signals executed on 7/01/08 and 7/11/08 and therefore is skeptical of Friday's surge higher, but is now open again to new and true (not Xxed Out) index buy signals in this choppy gold stock market.

Since I tell you when SKI is wrong and misses gains in the gold stocks, I'm allowed to write that the last 3 weeks were again almost day-to-day SKI perfection, except for this past Friday. I've now bought and sold just 3 times in the first 6 months of 2008, with a market risk/exposure of only 7 weeks and have been at a small loss for a total of 5 trading days (the first 1-2 days after each buy). Those trades in a broad basket of gold stocks have netted a gain of 18% in 2008 (since I only put in 25% of my monies on this last fast trade).

Best wishes, Jeff

P.S. Here's a snippet of a personal section that is slightly related to the financial world and will answer some of your emails regarding my wife's health:

First, my lung-cancer-fighting sister called to ask what to do. She needs money to pay for her skyrocketing medical bills and didn't want a certificate of deposit that comes due on Monday to renew. When she called the bank on Friday, she received a message that the bank had been closed (it went under). It was in my newspaper this morning as being the largest bank failure in a decade (IndyMac Bancorp). I told her that although the Federal Deposit Insurance Corporation (FDIC) only has enough money to pay off perhaps 2% of all insured bank deposits in the U.S., her bank would probably re-open on Monday under the name of a different bank and that all would be OK. She said that she doesn't have the time or energy to deal with this. Second, my trip to Los Angeles for a second opinion regarding my wife's continuing cervical pain yielded a most interesting and simple hypothesis ("simple" is always good!). The neurosurgeon wants to rule out the possibility that the fusion on her neck wasn't perfect and that something is still wrong. For example, bone could have grown in such a way as to impinge on a nerve that couldn't be seen via X-ray or MRI. Lisa had a special type of CAT scan yesterday and we'll find out in a few weeks. She checked this hypothesis on her spinal pain forum and found several other folks who confirmed that that had happened to them and that after a subsequent second surgery, all was well! After all, her pain re-started about 6 weeks after surgery last year and hasn't remitted. She wondered why her orthopedic surgeon hadn't considered this possibility since we keep telling him that something is wrong and he simply repeats that the fusion looks perfect and sends her to the pain doctor. The point is, ALWAYS SEEK A SECOND OPINION BECAUSE EVERYONE CAN GET FIXATED IN THEIR THINKING ONCE THEY GET AN IDEA IN THEIR HEAD. That last sentence pertains to gold and Jeff as well. Try to obtain and read opposite views of the gold market to prevent you from getting wedded/fixated on your own beliefs. Be flexible and view the world in terms of hypothesis-generation (but remember, that statement comes from a scientist [me]).

If you are interested in following and learning more about the SKI indices, I'll write another Report for 321gold 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. 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.

SKI archives
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.

Copyright © 2002-2024 Jeffrey Kern. All Rights Reserved.

321gold Ltd