Reply #1: WrapUp by Martin Goldberg

[ozymandius]

HUI GOLD BUGS INDEX AT CRITICAL STAGE
Overbought, or the Beginning of Something Really Bullish?

The HUI Gold Bugs index is at a technically critical stage the intermediate term. The action over the next 1 to 3 of weeks will likely provide a tip-off as to whether a full force resumption of the secular bull market in gold stocks is resuming, or whether gold stocks are now simply overbought and due for yet another painful correction. The long term basis for this determination is found within both Elliott Wave theory and simple logic. In tonight’s article, I describe the simple logic behind the long term evaluation of gold bugs index, and the short term indicators that are likely to shed light on the likely short, intermediate, and long term action in gold stocks.

-see chart-

Referring to the long term weekly chart above, the simple logic that is shared with Elliott Wave theory is that bull markets occur in three distinct “up” waves that are separated by “corrections” which move against the long term up trend. These three waves are separated by three distinct types of aggressive buyers. The first group that accounts for the first of the three up waves is the one most knowledgeable in the fundamentals behind the bull market. These intelligent folks and insiders are comprised of those who fundamentally understand the justification behind the new bull market. It is these individuals that are aggressively buying while the crowd is selling. In the case of gold stocks, this Wave I began in late 2000, and lasted until December of 2004. Bull markets never go straight up and therefore, there are corrections that follow each distinct long term up wave. The corrections re-instill the bearish sentiment in the crowd that existed before the beginning of the bull market, yet some if not most of the original gains made in Wave I, still stand up in the face of this correction. In the case of the HUI bull market, this long term correction began in December of 2004 and lasted until the spring of 2005, a period of almost 1-1/2 years. While the beginning of the bull market carried the Gold Bugs index from about 35 to almost 260, the correction that followed only took the index back to about 164, thereby preserving most of the initial gains.

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Notable in today’s market are the following:

- Trading volume this week has been relatively high with little net price movement. This suggests that there is likely to be a turning point occurring soon. While there is still not adequate evidence to sell or go short, the market is probably near an important turning point. Everyone is expecting a “Santa Claus rally,” and professionals are expecting a bullish market with Wall Street bonuses at stake. Although they tend to be correct during Wave 3’s, at important turning points in the market, “the crowd” tends to be wrong.

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