Special SKI Report #114
Gold Stock Update

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Dec 23, 2012
Published Dec 24, 2012

Current USERX price = 11.46, Down another 63 cents (5%) 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

The last gold stock SKI Report, written on Sunday 12/02/12, addressed whether the decline in the gold stocks had killed the infant gold stock bull market that had potentially initiated via 92-96 index buy signals on 9/05/12-9/06/12. Two bull market rules (based upon the behavior of all prior bull markets) HAD been broken, but the primary rule (remaining on a 92-96 index buy signal) had not been broken. Therefore, the infant bull market was still alive and a run pattern of 2 Up and 5 Down was suggesting that another low was approaching.

Since that Report, the gold stocks declined for another 3 trading days to form a classic 2 Up and 8 Down run pattern into 12/05/12 at USERX 11.64. The run down was very weak, averaging only a .8% decline per day. That tied the weakest such run patterns since 1974. The history of such run patterns, provided to SKIers, was:

1. Such run patterns HAVE marked bottoming AREAS 90+% of the time, but the formation of such a low has varied to such a degree that there isn't any consistent conclusion. Sometimes (10%) the run down marks the exact low. Usually, due to the weakness in the run down, there's a variety of "tricks" and/or plunges. The gold stocks can rise for 1-2 days and then plunge for a day for the low (hence Jeff’s anxiety on Thursday night that yielded a $20 gold plunge but then an immediate reversal). Or the rise continues for 3-4 days and then a decline to a marginal new low, a rise again, and a decline to another marginal new low followed by a multi-week rise. This is why Jeff has decided not to do any selling if USERX declines to below the bottom of the run pattern (i.e., below USERX 11.64).

2. The rises that have occurred after such lows (90+% of the time) have varied greatly in duration. The shortest rises have only lasted 5 trading days. The longest have persisted for many months.

3. If the run pattern is marking a low (or a low “area”), the subsequent rises have all been rather gradual/weak. There haven’t been 10% rises in a week. Therefore, a solid big rise from such a run pattern is NOT expected, but it usually IS marking the formation of a low.

That run pattern yielded the minimum historical rise of 5 trading days into the high on USERX 12/12/12 at USERX 12.13. The rise hit/touched the 16-20 index resistance for the fifth time since the 9/21/12 high in the gold stocks, but did not get over that index. And so the intermediate-term downtrend from that 9/21/12 high was continuing.

Did you notice the market’s behavior this past Monday (12/17/12)? Gold rose $1.20, the general stock market rose, and the major gold stock indices (HUI/GDX) closed slightly higher. But USERX (and many broad-based mutual funds) closed solidly lower. Here’s Jeff’s concluding comment from the daily SKI Message on 12/17/12: “Seasonal festivities suggest cheerfulness, but today ranked in the top 5 "nausea" (feeling impending doom) days of the year for Jeff” because that was a significant negative divergence (a surprise decline in USERX coupled with a rise in everything else). Although I’ve read multiple articles citing “market manipulation” for gold’s $35 decline on the next day, the only surprisingly market behavior was that such selling didn’t occur immediately during overnight Asian/European trading.

And then, on Friday (12/21/12), gold rose $14.20, but USERX closed UNCHANGED. Such unchanged days count as a continuation of the run pattern. In this case, it was the 5th consecutive daily decline in USERX. Such runs down usually (90%) stop at 5 or 6 days down. Friday’s negative divergence (gold up and the gold stocks down) suggests a decline on Monday (12/24/12).

Conclusion

The important issue is whether the 92-96 index will actually generate a sell signal on this decline. The HUI’s 92-96 index was hit/touched on 11/15/12 to mark “some type of low” and the index did not sell. This past Thursday’s (12/20/12) INTRA-DAY decline of 2.5% hit/touched the 92-96 index but then the market rebounded. That behavior was consistent with the infant bull remaining alive and the 92-96 index is providing support.

Look back 92-96 trading days. USERX’s back prices from then are rising and are at 11.27 while the HUI’s 92-96 index back prices are right here at 426.28. The indices take several days to generate a signal. A decline on Monday won’t be surprising because of Friday’s negative divergence (see above). Such a 6th day decline won’t sell the 92-96 index, but the gold stocks MUST bottom now or on Monday to avert the “death of the infant bull market”. And then the rise must continue for months in order to avoid a 92-96 index sell signal. Let’s see what type of rise follows this run down: A rise into a confluence of indices in X trading days (“X” = reserved for SKIers), followed by a brief decline to sell the 92-96 index would suggest significant bearishness.

Happy Holidays and Best Wishes for the New Year (despite the rotten gold stocks that may be forming QUITE the intermediate-term low), Jeffski

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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