"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


Thursday, September 8, 2011

HUI Demonstrating extremely Bullish Technical action

The gold mining stocks, as illustrated by the HUI index, are storming higher again today as it once again defies the lower trend in the broader stock markets. This pretty much confirms the fact that the miners have now separated themselves from the action of the stock market and are trading on their own fundamental merits. This is not to say that the broader equity markets will no longer have any impact on the mining sector whatsoever; it is merely to state that we no longer are going to see a nearly direct relationship between the performance of the mining shares and the performance of the rest of the stock market.

Note that the miners are now strongly outperforming the rest of the market. This is the reason we recommended to the hedge funds that they close out those ridiculous ratio spread trades that they had been employing with a long bullion position against a short position across most of the mining shares as a trade strategy. It was a trade that would only work for a while until the sheer lopsidedness of it depressed the shares to insanely cheap levels when valued against gold bullion.

I am sending a few charts in this post for consideration. The first is the HUI itself which is exhibiting classic technical price action from a bullish standpoint. Towards the end of August it finally managed to clear the very stubborn and formidable 580 level which had held it in check for some time. It then mustered that strength and pushed to its all time high near 610 before retreating somewhat. However it found willing buyers on the dip lower (most likely hedge funds who were prescient enough to realize that they had overstayed that damned ratio trade) and then rocketed right back up to that level at the end of the month. Once September trade commenced it GAPPED through overhead resistance forming a GAP and GO pattern ( some like to refer to this as a BREAKAWAY GAP), which is extremely bullish as it indicates strong, pent-up buying demand from both trapped shorts who are now panicking as well as fresh buying from eager, would-be longs.

Upon breaching the all time high at 610, price subsequently retreated and retested the GAP region from which the move higher commenced. It acted perfectly, uncovering buying as it moved lower and filled the gap as guys who missed the initial move higher but were anxious to get in on the long side, jumped in. Today, we see additional short covering as well as fresh buying taking the index to yet another all time high.  I would have liked to see a bit more upside strength which would have formed a stronger candle signal on the chart instead of the potential spinning top but the index held very well all things considered. Tomorrow's close is setting up to give us the clue as to where we go next. A weekly close above 622 will be very bullish.

Looking at the ratio of the HUI to the Gold price, we can see that the shares have recovered some ground against the metal and are attempting to catch up to the gains in the bullion but they also have some additional work to do.