"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Friday, October 28, 2011

HUI technical chart

The HUI put on a spectacular showing this week gaining more than 65 points and taking out several overhead resistance levels on its price chart in the process. The catalyst seemed to be the positive response by the broader equity markets to news coming out of Europe regarding their bank recapitalization plan and their funding of the Stability Mechanism. While I am personally repulsed by such actions the facts are that the hedge fund community could not wait for the ink to dry on the press release before they began pouring money back into the Risk Trades.

The resultant rally in stocks fed into the gold mining shares with the HUI actually outperforming gold this week.

We will have to wait to see whether there is a continuance of these risk trades next week but from a technical perspective the strong price action bodes wells for additional gains early next week. That would put the index up against a strong overhead chart resistance level coming in near 595 and extending towards 600. The shares have been stymied near this level in the past so the bulls have a big test of resolve coming.

The push past the last Fibonacci Retracement level of note near 580 should allow the index to first test the level just a few point above today's high. Should the bulls take this out, then the run towards major resistance will commence.

If the index sets back, dip buyers should surface down near the 560 level and again near 545.

My thinking is if we are moving back towards a period when RISK TRADES are back in vogue, the HUI should continue to lead the metals and outperform gold in particular. Note on the chart it is close to decisively ending the downtrend against the gold price. If the shares are going to eventually take a leading role then the horizontal resistance level noted on this ratio chart will need to be bested.

As a side note, that we are seeing some companies in this sector raising their dividends is a good sign and indicates that their management feels that earnings are strong enough to do so and should remain so for the foreseeable future. In other words, they are optimistic on future price prospects for the metal. That is also a sign that we should expect to begin seeing or hearing about planned aquistions by some of the majors or even larger mid-tiers as they look to increase their reserves. That should support the juniors which are of high-quality. This might be occurring already based on the ratio of the GDX to the GDXJ (major to juniors).

Note that since May of this year the majors have been outperforming the juniors as a whole. Beginning late last month (September) that began to change. Apparently some are already sniffing this change and are thinking acquisitions based on the profitability of the larger miners in the sector.

1 comment:

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