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HUI Gold bugs Index and Crude Oil Analysis - Extreme Fear

Commodities / Forecasts & Technical Analysis Jan 18, 2007 - 10:34 AM GMT

By: Clive_Maund

Commodities

Stockmarket trading has certain similarities with driving a car. As a commuter you may have driven the same route a thousand times to get to work, but every day is a new day and you always have to be ready for the unexpected, such as a child running out in front of you or someone suddenly cutting you up in heavy traffic.

We have traded these markets on www.clivemaund.com successfully over the past several weeks, avoiding heavy losses and making money in Put options in stocks such as Newmont Mining, and, just a few days back, or even a day or two ago, it looked like the drop would continue. But, like the first breath of wind before a storm, evidence has begun to appear that a possibly dramatic reversal to the upside may be close at hand.


HUI Gold Bugs Index

We have seen a run of rather bullish looking candlesticks this week in PM stocks. Each day the Precious Metal stock indices have fallen significantly intraday, but gone on to close the day with only minor losses. The market is clearly finding support at these levels, and if we look at the 1-year chart for the HUI index, we can see that it arises from the trading range that developed just beneath current levels during much of September and into October. We had already taken the oversold condition indicated by the medium and short-term stochastics shown at the top and bottom of the chart into account, but had figured that after a brief relief rally to alleviate it, the market would drop again to lower levels, back down to the strong support in the 270 - 280 area. However, the all-important MSI indicator, the Maund Subscriber Index, has risen quickly in recent days to levels that indicate a market dripping fear, and a check of other sentiment indicators tells the same story.

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The level of fear prevailing in this market now is that which normally signals a bottom. The HUI index has been down for 16 of the last 26 trading days, with the XAU index being down for 7 trading days in a row. In addition to this, oil marked out a Reversal Day hammer candlestick yesterday bang on our previously flagged critical $54 support level, providing collateral evidence that a sudden turnaround may be in the offing. We have seen continued dollar strength over the past couple of days as expected, but this has now taken it to normal overbought extremes. It is perhaps no coincidence that the President is going on television tonight to make the troops announcement.

Crude Oil 6 month chart

Alright, bearing in mind the stance we had taken just a few days back, what are the tactics for dealing with this situation? Those who have not taken action and shorted the market should not now do so. Those who have, have the choice of either covering the positions immediately, which is highly recommended at the current favorable prices. Bearing in mind dealing costs, this would probably involve getting out at a slight loss. The alternative is to wait for the probable big up day that would signal a reversal, which could be costly, but which of course might happen after further downside first.

Finally I wish to assure loyal readers that I do not take lightly having to suddenly reverse position like this, and am well aware of the frustration and annoyance it can cause, but at times, markets require it. The position taken in this article does not negate what was written in those earlier articles, but at the very least it now appears that we can expect a sizeable rally, and we need to adjust our positions accordingly.

By Clive Maund
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.


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