De-Constructing HUI -
A Technical Road Map
David Petch
February 1, 2005
The article today is an important
technical breakdown of the HUI and the implications that certain
components of the wave structure are pointing to preferred counts.
This article is meant to serve as an updated "road map"
of the HUI for the next 12-18 months. For those who have not
read any articles by myself, I follow Glenn Neely's approach
to Elliott Wave Analysis. He wrote a stand alone book titled
"Mastering Elliott Wave". If you do not have this book
I recommend picking
it up. There are some important additions to his procedure
since the book was written in 1988. The two points below should
be read and understood, especially the component for what defines
an impulsive wave. This is critical, since failure to observe
this rule will often result in the wrong labeling of a wave pattern.
Diametrics
I requested this information
from Glenn Neely, since he discovered these formations after
his book "Mastering Elliott Wave". This is verbatim:
"A diametric formation is a NEW pattern I (Glenn Neely)
made in 1990- about two years after I finished Mastering Elliott
Wave. As a result it is NOT mentioned in the book.
A diametric is a 7-legged formation
(Triangles are 5 and Flats/Zigzags are 3) that does NOT involve
an x-wave. As a result, instead of a-b-c-X-a-b-c, I had to continue
with the alphabet, labeling it as a-b-c-d-e-f-g. The distinguishing
factor of a Diametric is the similarity of each wave segment
in time and complexity to the other six. In Flats and Zigzags,
time/complexity differences are extreme between waves a, b and
c. In Triangles less so, in Diametrics similarity is the rule.
In general, Diametrics appear
to occur in two main categories. One, which is a period of expansion,
is evident during waves a-b-c-and d, the period of contraction
for waves e-f and g. or the reverse occurs. Contraction first
during the first four wave segments then expansion second for
the remaining three.
This creates the look of a
bowtie for the first series and a diamond shape for the second."
One More Important Elliott
Wave Tid-Bit
In his book, Neely says all
impulsive patterns must contain an extension. He clarifies that
in the Sept 96 Futures article "the trending wave (either
1,3 or 5) that traverses significantly more price than the other
two is called the extended wave (price extension); the trending
wave that traversed significantly more time is called the prolonged
wave (time extension); the trending wave that possesses significantly
more subdivisions is called the subdivided wave (complexity extension).
NeoWave demands that every impulsive pattern possess at least
two of the three above Rules of Extension. Failure to meet that
requirement indicates the pattern is not impulsive - it is that
simple".
Those are some items that are
not readily available, so I hope that helps to clarify why some
impulsive counts I may have are different from what classically
is considered an impulsive segment. For the most part, these
additions increase the accuracy of the count significantly. There
is a couple of CD"s on Ino that have further information
that Glenn Neely has developed. One final note: wave 2 of any
degree can retrace up to 99% of wave 1, however, that would be
one segment of the correction and wave 2 would likely complete
at a 61.8% retracement. In general however, if wave 2 retraces
more than 61.8% (there are exceptions, but very few), then the
wave structure is not impulsive).
Analysis of the AMEX Gold
BUGS Index (HUI)
The HUI has been chopping sideways
for the past two weeks, further driving the consolidation phase.
The Bollinger bands are suggestive of some light being present
at the end of the tunnel. During declines, the upper 55 MA BB
when it begins to curl down is a sign that an interim bottom
is in place. The upper 55 MA BB recently has curled down, albeit
shallow. The lower 55 MA BB has declined well beneath the cash
value of the index and when it begins to curl up, it will be
a good indication a bottom is in. The upper and lower 21 and
34 MA BB's are starting to near a convergence point. A chart
further on suggests when a turning point will occur. Notice the
purple horizontal trend line showing 200 as firm support. The
short-term stochastics had the %K move beneath the %D. I do not
want to hazard a guess as to which way the pattern will weave,
since it could turn on a dime. The recent action in the HUI does
suggest further consolidation. Refer to Figures 4-6 for the Elliott
Wave counts of short-term, mid-term and longer-term views of
the HUI.
Figure 1
The moving averages are starting
to head toward a focal point. A long-term trend line was drawn
in purple to illustrate the behaviour of the index, using it
as long-term support. The full stochastics shown below have red
lines at the %K crossing above the %D (buy) and green lines to
show the %K crossing under the %D (sell). The setting chosen
is equivalent to 11 weeks. Notice the purple circle highlighting
the %K line. It is below the low place in May 2004 and no other
point during the start of the bull market in 2001 has the %K
been lower than the current level. The %K is still in the process
of bottoming.
Figure 2
The weekly HUI is shown below.
There is a lot going on here, so I will slowly break up the points.
A Gann fan was put in place to show the 1x1 line (red) has been
holding support of the index since the inception of the bull
market (Note: this has a very similar slope to the purple line
drawn in the prior chart). Fibonacci retracements of the move
from 35 to 258 are shown on the right hand side. The HUI went
a hair below the 38.2% retracement in May 2004 and has since
been placing in higher lows. The Bollinger bands up until recently
had the lower 55 MA BB oscillating at increasing amplitudes as
the pattern developed. The flattening of the 55 MA BB suggests
an eminent break to the upside is looming. Also, Fibonacci time
dates of the move from late 2000 until December 2, 2003 are shown
at the top portion of the line. The 61.8% time frame is in early
October of 2005. I do not think wave III will start at this point,
likely towards the end of 2006 (this would be a near 1:1 equivalency
of the entire wave I and wave II). Please carefully review Figures
4-6 before Figure 7 (You are here chart) so see why late 2006
is a likely starting place for a very powerful wave III. Notice
the full stochastics have the %K reaching a similar level to
May 2004.
Figure 3
The short-term Elliott wave
count of the HUI is shown below. This chart is probably the most
revealing of the lot, with key technical issues that dictate
the two likely paths of the HUI. One point I would like to clarify
among subscribers is "why did you not choose the start of
the current decline to the left of the "X" at top of
the chart?" Good question. The pattern down is clearly a
corrective (:3) pattern. The elements of what determine an impulsive
wave pattern does not meet the criteria, so this possible count
was discarded. The preferred count is that wave Y is forming
a zigzag (5-3-5); wave [c] of this zigzag is likely nearing completion,
with the wave v of sub-Minuette degree placing in a terminal
impulse (ending diagonal). This pattern is likely to remain above
200. The alternative count is that the decline in May 2004 was
wave [A].II and the move up was wave [B].II. Wave [B] had an
impulsive nature to it; it could be counted corrective, but at
a much lower probability. Wave [C] would be underway if this
was true. The circled grey counts represent the alternative count.
Wave [iv] would be complete and wave [v] would be underway. Wave
[i] was extended in time and complexity and wave [iii] CAN NOT
be the shortest impulsive wave. Wave [iii] represents 18 points,
so wave [v] can not be over 18 points long or the count is wrong
and the HUI is likely to head to 175. Wave [v] started at 212,
so the lowest it can go is 194. A move to 190 is bearish for
the short-term. As seen below, 200 is formidable resistance and
if the alternate count would come into play, there is good evidence
that a decline to 194 would be the lowest level. I would not
recommend adding positions to gold or silver stocks until 215
in the HUI is broken (pending 190 is not broken first). The pony
up price may be higher, but it will not be dead money.
Figure 4
The mid-term Elliott Wave count
of the HUI is shown below. This time frame captures the entire
correction of wave II thus far since the December 2003 top of
258. The alternate count shown on the prior chart would have
wave B labeled as a flat. The red circle shows the pattern previously
mentioned as being corrective in nature. The areas marked with
the thin black lines denote bullish and bearish breakout regions
of the HUI. I have termed the current positioning of the HUI
as "HUI Purgatory", because it sure feels like we are
waiting around for something. The 61.8% retracement of wave (A).[X]
is shown on the right hand side at 197. Waves W and X together
have a shorter time frame for the current wave Y forming. Feburary
3rd is the 1.23x Fibonacci date and February 10th is the 1.382x
Fibonacci date. This strongly suggests the HUI is going to see
some action in the coming week or two. Of note, wave [c].(Y).[X].II
is nearly 61.8% of wave [a].(Y).[X].II, a typical occurrence
among zigzag patterns.
Figure 5
The longer-term Elliott Wave
count of the HUI is shown below. The entire move of wave was
slightly over 3 years. Figure 7 shows why wave II is likely not
going to complete until late 2006. The pattern I have been building
up to is that wave II is a running correction: Wave [W]-[X]-[Y],
where wave [X] is a zigzag (5-3-5) and wave [Y] is a triangle
(3-3-3-3-3). The prior two charts have already provided detailed
descriptions of the current correction, so it will not be discussed.
Notice how the longer-term trend line and the shorter-term trend
lines have not been broken. The HUI is likely to finish the current
decline within the next 10 trading days in the range of 194-200
and advance up to 280-300 by July/August. After this a large
triangle lasting 12-16 months is expected to form.
Figure 6
The current chart is a "You
Are Here Chart". The start of the green represents the current
time frame in good ol January 28th, 2005. Notice the full stochastics
have had a rising trend line since late 2000. One important feature
of impulsive waves is wave III CAN NOT at any point in its development
touch the established 0-2 trend line. If it does, it is not the
starting point of wave III. I do not believe there is enough
of a coiled spring present for wave III to initiate, rather the
running correction scenario I proposed in September 2003 is in
effect. The hypothesis has worked well up to this point, so I
see no reason to discard it until it fails the test. The 0-2
trend line is shown below. The earliest point of wave III realistically
starting is in late 2006. Wave (C ).[X].II is very close to developing,
taking the HUI up to 290-305ish. The triangle is likely to have
wave (A).[Y].II decline to test the 260 region and form the triangle
structure shown below. Since the wave [Y] is defined as a non-limiting
triangle, it increases the probability that the index will run
to the apex of the triangle (convergence points of the upper
and lower triangle line). Non-limiting triangles also can terminate
40% before the apex, but this would put the slope of the 0-2
trend line too high up (it already is overlapping the early waves
of wave I). When wave III commences, hold the gold and gold shares
because the move should last until 2009-2010. Wave V is when
it will be time to unload. Note though this will be a very volatile
wave to trade, but most of the money is made near the top.
Figure 7
I hope this article will serve
as a road map for the next 12-18 months of the HUI. Should 190
be taken out, then a decline to 150-175 is in the cards at a
later time this year. There would be a rise in the HUI to around
210 or so if 190 was taken out and this would be a time to sell
prior to a down leg occurring. As mentioned above however, I
do not see this having much merit at the present.
One final note: Glenn Neely
in an interview on Jim Puplava's wonderful Internet radio broadcast
show stated the S&P 500 Index was in wave (IV) and had another
10-15 years left in the bear market. He implied the lows of 775
in the S&P would remain intact. A penetration of this level
would have him re-evaluate his count. We currently are in an
inflationary environment and the nature of mankind and nature
is to advance in logarithmic progression. An S&P at 800-900
in 2014-2015 will be equivalent to the S&P at200-300, so
do not worry, there will be pain felt later on. I have a derivative
count of the S&P according to this.
This article is typical of
one posted at our site. I try to have one editorial per week,
with four other articles mainly updating the other specified
index (with minor editorials if points of interest are found
throughout the week). The AMEX Gold BUGS Index (HUI), US dollar
index, S&P 500 Index, AMEX Oil Index (XOI) and the 10-Year
US Treasury Index (TNX) are updated once per week, with brief
updates on other days when warranted. (Minimally 4 charts per
index). Captain Hook also provides excellent market timing and
the best "macro" or big-picture commentaries on the
web. If you are interested in our services, please contact us
at www.treasurechests.info.
January 31, 2005
David Petch
 email: ITMmyFAV@aol.com
Treasure Chests
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