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Technical Education- re: Gold, Silver & HUI
Some technical education is badly needed in regards to the precious metals complex. Some analysts have been calling patterns in these markets while being oblivious to the requirements for these patterns.
It is most obvious in Gold. Everyone seems to be calling the 2008-2009 consolidation a “inverse head and shoulders bottom.” This is not the case. An inverse H/SH pattern occurs following a downtrend- not a top. A cup and handle consolidation is more likely since that usually looks like a big “u” shape. Unfortunately, the bottom of the cup ($700) is way to close to the previous bottom of $640 in summer 2007. The entire formation is most likely what we call a running correction. Corrections are usually three but can also be five legs. In three legged corrections you can have a zig zag, a flat (think of the flag in a bull flag pattern) or a running correction. In the latter, you see the B leg make a new high and the C leg bottom where the correction started. Since 2006 (when many gold stocks peaked), Gold has been in a large primary degree running correction.
In the next chart we show the HUI and Silver as they look very similar. Is the action since September a cup and handle pattern of an inverse H/SH? First of all, a cup and handle pattern is a continuation pattern- it continues the uptrend. It’s not a reversal pattern. Now, in H/SH patterns, we need to realize that these occur after long trends. For their to be a big H/SH bottom, it needs to occur after a long downtrend- not the sort of crash we saw in both the Silver and the HUI. That being said, the price action, to some degree resembles a H/SH reversal bottom. We should be vigilant but not expect anything. The chance of these markets completing a true inverse H/SH bottom is about 25%.
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