Bullish HUI Technicals
Adam Hamilton, February 5th, 2010
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Bullish HUI Technicals
By Adam Hamilton
Over the last couple weeks, gold and silver stocks have been clobbered. The flagship index that tracks this sector, the HUI, hemorrhaged nearly a sixth of its value in just 8 trading days! Frightened traders have been scrambling for the exits, dumping their PM stocks at any price to rush their capital out of harm’s way.
While such a freefall sounds very bearish, it is actually incredibly bullish. The mission of investment and speculation is to buy low and sell high, and the best times to buy low are when prices are plunging and traders are practically soiling themselves in fear. If you want to multiply your capital in the markets, the surest way to do it is to buy aggressively when nearly everyone else is rushing to abandon ship.
The infamous 2008 stock panic is a perfect illustration of this truth. Over just 5 weeks ending in late October 2008, the HUI plummeted a mind-blowing 57.2%. PM-stock traders were so caught up in the popular fear that they failed to realize that stock panics are not the Apocalypse. Markets perpetually flow and ebb, yet life goes on. We were buying aggressively near those panic lows, and were richly rewarded. Over the next 9 weeks, the HUI doubled!
While the recent sharp HUI selloff is trivial compared to that once-in-a-century stock panic, these same principles apply at a smaller scale. When a sentiment storm slams into a sector with strong fundamentals and leads to a blitzkrieg of selling, the new lows never persist. Extreme fear never lasts long, and as soon as the storm clouds of emotion start clearing the beaten-down stocks quickly rally back up to big gains.
Thus the recent precious-metals-stock selloff has created awesome buying opportunities. Far from portending an endless death spiral lower as most traders seem to assume, today’s deeply-oversold HUI technicals are extremely bullish. For disciplined contrarian traders with the fortitude and wisdom to ignore the herd’s irrational hysteria, the HUI’s incredibly bullish near-term prospects are readily evident in these charts.
Precious-metals stocks have never been for the faint of heart. They are very volatile and unforgiving, but that’s their charm too as these wild moves create great opportunities. In the pre-panic years between 2000 and 2007, the average HUI upleg surged 94.4% higher over 8 months while the subsequent average HUI correction fell 28.3% over 3 months. Big and steep selloffs are nothing new for PM stocks, merely par for the course.
Since its latest interim high in early December, the HUI has fallen 26.7% in just under 8 weeks. As is often the case in PM stocks, this correction has been two-staged. There was an initial 17.6% leg down in early December that paralleled gold’s own. Gold has always been the PM stocks’ primary driver, traders buy PM stocks when gold is strong and sell PM stocks when gold is weak.
This initial December correction in PM stocks was sharp, but it only lasted a couple weeks. Then the HUI actually bounced at its upleg support line that was established throughout last year. A few days before gold itself bounced, the selling in PM stocks had been so aggressive that everyone interested in selling soon had already sold. And once gold started heading higher again in late December, the HUI followed.
While we sold some PM stocks at 100%+ gains in Zeal Speculator in early December, we weren’t buying that late-December bounce literally or metaphorically. Given PM stocks’ volatile history, they hadn’t corrected long enough or deep enough to properly rebalance sentiment by eradicating the early-December greed. And as the 21.4% HUI correction in June and early July of last year reinforced, major HUI corrections often encompass two separate and distinct legs down.
And a couple weeks ago when today’s second leg down commenced, it was fast and furious as you can see in the chart. The HUI not only shattered its uptrend’s support, which officially signaled it was in full-blown-correction mode as opposed to mid-upleg-pullback mode, it plunged to its 200-day moving average. 200dmas are incredibly important technical lines in trending markets. Within secular bulls the 200dma is the highest-probability point for corrections to run out of steam and tradable interim bottoms to be carved.
Many years ago I developed a trading system based on these 200dma approaches, Relativity. Over time in any given bull market, prices tend to advance and contract within a fairly constant multiple-range of their trailing 200dma. When they advance to the top of this range they are temporarily overbought, it is time to sell or go short. And when they subsequently retreat to the bottom they are temporarily oversold, the time to buy.
The latest relative trading range for the HUI is rendered above, between 0.95x and 1.40x its 200dma. Our subscribers have unlimited access to large long-term Relativity charts updated weekly on our website that show these ranges being established. Once you wrap your mind around these Relativity concepts, your trading will improve tremendously as you’ll have early warning of excessively overbought and oversold conditions that are not sustainable.
