Short-Term PM Caution

It doesn't have to play out, but a note of warning of the possibility is to be forewarned. Recently, I suggested that the fractal surrogate chart I have from the 70's played out with a final sharp drop in that PM stock surrogate. This is the type of chart I was looking for back in 2004 to do the HUI fractal work with. I could not find anything acceptable from the 70's so I had to settle for the fractal segment of the HUI chart from 2002 to use in 05/ 06. In that period of time we had not only had the price fractal to work with, but we also had all of the TA indicators that matched along the way. This chart is similar, and it pretty well matches the whole move of the HUI all the way from 2001 to today, though there may be minor differences as I have not studied it in detail.

Bottom line is that the HUI set-up at this moment is exactly like that surrogate from the 70's - very similar in price movements and very similar in the TA indicators that I currently have to work with. Thus, the RSI reading and pattern……..and the MACD reading and pattern…………..and the price relationship to the moving averages…….and the chart price movement………….all are very very similar to the HUI, today. (I am hoping that a positive change in psychology occurs to positively affect the PM sector at this time to negate the set-up, but……….)

If the fractal continues to play out, we could see a sharp fall in the HUI down to around the 365 area……..or even the 350 area. I had previously targeted the next two weeks if the move comes for a bottom, noting that I thought this coming week would be the most likely bottoming point. Looking at a different chart set-up of the HUI that more closely matches the chart set-up I am using, it looks more like about 2 weeks.

Please don't flame me whether we get such a move, or not. I almost did not post these comments since I have nothing to gain by posting what I see. If we do not get that move lower, I look like an idiot. If we do get the move, some may get mad at me……….the messenger. The fractal from the 70's "is what it is." It is a model.

Now, the good news. I am not short the PM sector even though the risk/ reward looks good for the short-term, here. I do not own any puts, period. The reason is that even if we get a sharp move down of some sort at this juncture, the fractal off the 70's would continue to play out to suggest a very, very sharp move higher in the PM stocks after a (more or less) V-shaped bottom. The potential target for the HUI would be up to around 800+ (after such a sharp fall) into the first quarter of 2011……….maybe April or May.

I know it sounds bizarre, but that is what the model "says." If we have marked weakness in the PM sector over the coming days- I intend to be a buyer.

It is fairly common that sharp up-moves are led by short, but sharp down moves as da boyz hammer leverage so they can buy (especially leveraged instruments) before they take price, up. JS has already stated that da boyz are covering their shorts in the PM sector including the stocks, and this comes into the heart of the time period I have long stated that the PM Bull would return in earnest based on the fractal charts and cycle in the Gold chart.

So, the question comes to mind, "What will likely outperform on the next momentum run?" As far as I can tell, we are currently in an analogous time-frame as early 2002……..like in the January period, if memory serves, though I looked at that weeks, ago. My opinion is that the mid-tier PM producers will be the sweet spot for the run, fully noting that we will see the usual cycle where the large cap producers lead with the explorers and lesser producers lagging.