SKI Gold Stock Prediction

presented by Jeffrey Kern, Ph.D.

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March 25th, 2005

Archived SKI Update
More About This Trade

This was the week that the gold stocks were supposed to fly up into a high on this coming Monday, the 21st day after the double buy signal. The exact opposite occurred, wiping out this trade’s profits and yielding a USERX (the gold mutual fund) decline from 8.48 last Friday to 7.78 this Friday. I am writing at a rapid rate, with this Update representing the fourth update in 6 calendar days. Emails from readers have dissolved from god-like bowings to derogatory defamations over the last three days.

The most important question is, “What have I (and you) learned this week?”. This was the week that the gold stocks were supposed to fly and when the master 92-96 index required that USERX maintain a price over 8.42. When prices plunged on Monday I wrote (via email) how I have usually sold on such days, but was going to wait to be sure that the 92-96 index was going to sell. Tuesday’s dismal performance caused me to sell at midday and to send another email notification of that sell. In retrospect, what I learned from this experience is that I should have done as I have always done, sell on Monday’s failure to explode upwards, take a small profit, and send an email sell alert. Thankfully I sold on Tuesday’s further failure. Nonetheless, I do feel the pain of this decline because my colleague remains psychologically “trapped” at a loss as he maintains his long position. On Tuesday, as I had my opportunity to check the gold stocks at 11:30 AM PST and sold, I immediately called up my colleague to implore him to sell. His wife answered the call and stated that he was in the shower. I doubt that he would have sold under any circumstance because he tries to refuse taking a loss. I lost 1% and am sulking at down 2% for the year.

What else has been learned? My colleague (the developer of the post-hoc XXing Out rules) points to the fact that we went against those rules. This losing double buy signal was XXed Out, meaning that it should lose money. If you recall, I reported that fact at the time, but pooh-poohed the XXing Out for having been wrong too often and causing me to miss rises. Frankly, I wouldn’t have done anything differently on this trade except for exiting a day earlier, on last Monday. If I had avoided the buy signals due to the XXing Out, I would have been at risk of buying at an even higher price when prices moved up nicely after the buy signal. I always say that one should generally avoid chasing the market if one doesn’t buy when the signal occurs, but that rule is not so easy to stick to.

The SKI mechanical system is going to take a big loss at this coming Monday’s close. The loss will occur in the exact week after I declared, “We are safe. All indices are on buy signals and the stop is rising”. Frankly, the indices allowed me to see last Monday as a failure day and to sell on Tuesday. In the span of one day I changed from rabid bullishness into a selling disposition. I always need to check the market once a day (11:30 PST). Note that I tend to exit any position if I am going on vacation (camping, traveling, driving the kids to college, etc.) because I always need to maintain flexibility, particularly if a critical point is approaching. This coming Monday was touted as a likely critical point one month ago. It is here.

When the gold stocks move diametrically opposite to the indices’ predictions, the implication is often quite significant. If the indices (and I) are bearish, but the gold stocks rise, I turn bullish. For example, remember my bearishness into the bottom last Summer. But after the unexpected rise starting on 8/13/04 at USERX 6.16, I turned bullish into the double buy on 9/17/04 at USERX 6.70. Currently, all my bullish rules have been broken. In addition to the failure of the double buy, you can also see that the 16-20 index has generated its “buy” signal for Monday. Note that Monday will be the 28th day after that last 16-20 sell signal. The half-cycle rule is: If, after 9-10 days, prices are higher than the 16-20 sell signal, the next 16-20 buy signal should come at a HIGHER price than that sell signal. It appears that the buy on Monday will come at a LOWER price than the 16-20 sell signal from 2/15/04 at 7.91. That would not be bullish.

The 16-20 index has generated its buy signal and the 92-96 has generated its sell signal for Monday’s close. Those two tied signals can certainly be marking a low. However, a new index twist occurred last Wednesday when USERX fell almost 4% to 7.84. The 35-39 index back prices were at 7.83 on Wednesday! I was hoping against hope that prices would rise on Thursday to avoid the 35-39 index. Thursday’s further drop therefore hit/broke/touched the 35-39 index! Any further drop will also cause a 35-39 index sell signal to be generated on Tuesday for Wednesday’s close. We would therefore obtain a classic double sell signal between the 92-95 and 35-39 indices while the 16-20 index buy signal would be indicating a short-term oversold condition. Will the 35-39 index sell this week?

The current run pattern is 1 Up and 6 Down. Readers know that the odds of the run extending beyond 6 consecutive days down are only 1-2%. Under such circumstances I usually write about how it’s extremely likely for the run down to end and therefore, for this coming Monday to be an up day. However, note that: (1) Monday is the day I have been pointing towards, (2) Monday is when the 16-20 and 92-96 indices execute signals, (3) Monday is exactly 221 trading days from the major low of 5/10/04 [the 218-222 index operates as a 221 day cycle], and (4) the breaking of the 35-39 index on Friday usually leads to a 35-39 index signal being generated, requiring a further price drop. Therefore, although the run is a moderately strong (1.5% per day) run down that has lasted for 6 days, it appears likely that Monday will bring a 7th day down, possibly a capitulation spike down. Will USERX hold above the 7.41 price low on 2/7/04? That 7.41 was supposed to be the low for the year based upon the 16-20 index buy signal that came a day after that low. I am concerned that prices might fall below 7.41. But what do I know? I really only know that something extremely important just happened and that we are at a massive psychological point in the gold stocks.

I don’t want to sound too bearish now. These coming index signals can mark a low of some type. But the mechanical system is not allowed to buy on a 92-96 index sell signal and certainly doesn’t buy on a double sell, should it occur. I’d expect some type of rise off of those signals but am unable to specify the extent and duration of such a recovery. If prices had only risen this past week, the true SKI bull market scenario would have been nicely set up and I was about to declare that last year’s triple sell pattern was overcome. I can say that due to last week’s decline, the triple sell is still alive and that the true bull market index pattern will have to wait. The long-term 218-222 index remains on a buy signal from several weeks ago and is unlikely to sell for a long time. That 218-222 index is the only index that clearly remains in bullish mode. I can only hope that we don’t have some parallel of the last time that a SKI double buy pattern yielded a system loss via a double sell. At the time of this double buy, I reported that the one time it had failed occurred right at the 1987 stock market crash that yielded falling gold stocks. Therefore, in conclusion, all that I know is that I am not supposed to take on the risk of being long at this time despite the likelihood that prices may rise after Monday.

P.S. The local Las Vegas newspaper reported the first month-to-month drop (just 3%) in home prices and I hear extemporaneous tales of people having to lower prices, but my neighbor just sold after 8 days on the market at her asking price. She’s buying a new smaller house. I did read Newsweek last week, noting with contrarian trepidation its article on the diminishing dollar. I also read Mark Hulburt’s report last week that positive sentiment towards gold had reached apparently unsustainable levels. I continue to refrain from using the word “manipulation” in discussing the gold market, but I must confess that this week my colleague became an active user of that word for the first time in two decades. The indices are supposed to reflect human behaviors of buying and selling. Both small investors and central banks or government entities involve humans buying and selling. I can never resort to “manipulation” as the reason for a double buy failure.

How Did This Trade Work Out?

February '05 to March '05

SKI BUY SIGNAL SKI SELL SIGNAL Jeff Sold SKI Gain/Loss Jeff's Gain/Loss
Double Buy Signal

Feb 24 05
Major Double Sell

Mar 28 05

Mar 22 05
$-0.52 $-0.04

While this trade was a loser, prices plunged immediately after the signal saving our readers a tremendous amount of pain. Here are the orginal SKI Updates for this trade:

  » Alert: Jeff Sells Early
     Mar 21 05

  » The Sell Signal
     Mar 25 05

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