Gold, Silver and Other PMs: Signal I Waited For

» Normxxx - Signal I Waited For

By Jeffrey M. Kern, Ph.D. | 8 August 2005

Put me in suspended animation after I buy

Simple translation of this Update: Buy gold stocks on Tuesday's close. Then sell on a sell signal or at a 100%+ profit. The maximum risk is a large 20% until 5 months after the buy day.

Last weekend I wrote that the next weekend's Update (this one) should be the BIG ONE. At least I got that correct. Mark Tuesday 8/9/05 as the day that the indices go to the long-term bull market side. The rare event that I spoke of a month ago appears to be occurring. The master 92-96 index will be buying on Tuesday's close on the rare 92-96 index buy signal that is on the Path and NOT XXed Out. The buy signal is going to be generated on Monday and SKI will be risking his monies starting on Tuesday's close.

Please remember that SKI signals mark critical points. And they do it beautifully. I must write that it IS still possible that last Wednesday's spike into the 92-96 index at 8.29 (US GLOBAL INVESTORS FUNDS US GO (NasdaqSC)— USERX) could have marked a major high. That run pattern of 3 Down and 5 Up marks the high at 8.29. But that scary run pattern (that for example, marked the exact multi-year high on 12/2/03 at 9.37) can be offset by 4 or more consecutive days down to form a low. The declines on Thursday, Friday, and today give us 3 days down. IF we get 1 more day down (of any size), the run pattern will also turn bullish. Please go your nearest gold sanctuary and pray for Tuesday to be a down day of any size. One more day down into the buy signal will arrest almost all of my fears that I will be buying near a major high.

Now I am going to temper your enthusiasm a little more. The risk on this buy signal is substantial. Nothing can offset the master 92-96 buy signal except for a 92-96 sell signal. Those 92-96 back prices are falling and will continue to fall down to the 6.28 May low. In other words, I (You) could lose about 20% on this signal in the worst-case scenario. Plan now that you MUST sell on a 92-96 sell signal at any time in the future. And the eventually rising stop-loss will take 96 trading days (5 months) to reach the 'all-clear' point. Therefore, for this buy signal to generate a profit, prices need to rise for more than 5 months before there is a rising stop. The 92-96 buy signal would be predicting rising prices for far longer than 5 months! And such a long-term rise is exactly what is expected. But if it is wrong, it will sell at a loss.

The other possibility is that prices fall into Tuesday and the index buys at let's say, 7.85. Thereafter, prices immediately fall and sell the system out in just a few days for a 3-4% loss. There have been several 92-96 buy signals on the Path that have sold very rapidly at small losses. That would be unfortunate, but acceptable. A 20% loss would be the largest in history and would be unbearable for me.

[Normxxx Here:  Me too! ]

Here is the history of 92-96 index buy signals on the Path. Be aware that the 92-96 index does not sell out at highs. I'll have to rely on the run pattern or something else to identify a sell point near the top. For example, on 5/29/02 I wrote, "The run is now at 2 down and 7 up, rising an average of almost 3.5% per day. Such runs have ALWAYS marked major highs EXCEPT during the greatest bull markets in history (e.g., during the late 1970s). THIS RUN PATTERN HAS ALWAYS MARKED MAJOR HIGHS EXCEPT DURING SUPER BULL MARKETS. Therefore, after USERX experiences its first down day, that should be a major high." I sold there. Thereafter, USERX plunged to 3.58 and the 92-96 trade finally sold at a (lesser) profit at 4.06.

The suitable 92-96 index buy signals on the Path have been correct 8 out of 11 times. Note that they are not perfect, but are the required SKI signal for all huge bull runs since the early 1970s.

[Normxxx Here:  That is, they are necessary but not sufficient to insure a large profit. ]

1. 1974: Buy 42.8 Sell 50.8 in only 15 trading days.
2. 1977: Buy 14.2 Sell 16.0 in only 31 trading days.
3. 1977: Buy 14.7 Sell 15.7 in only 29 trading days
4. 1977: Buy 16.5 Sell 21.0 in 136 trading days
5. 1977: Buy 21.5 (Exact high to the day) Sell for a 7% LOSS at 20.0 in 9 trading days
6. 1978: Buy 20.8 Sell 73.8 in 465 trading days. The first great bull run.
7. 1981, October: Buy 54.8 Sell for a 2.6% LOSS at 53.4 in 2 trading days.
8. 1982, July: Buy 40.6 Sell 88.2 in 220 trading days. The second great bull run.
9. 1983, 4 days after trade #8 ended. Buy 85.1 Sell 89.7 in 16 trading days.
10. 1985, May 5: Buy 56.6 Sell for a 18.4% LOSS at 46.2 in 61 trading days. This one was an 18% loss and was very strange. I actually delayed buying, then sold when it rose 10% in a week, then bought back and sold at 46.2 for a total loss of 12%. Bad.
11. 1993, Feb 11: Buy 14.8, prices rise to 28.3 over 6 months before collapsing into the 92-96 sell at 18.50 (the exact day of a major LOW!). This was what I call the third bull run since 1972.

The current signal (today) cannot sell out quickly at a profit. This one will either have to sell out fairly quickly at a loss or be a great bull run. The bull run, if it occurs, would be wave 3 up and should be the most powerful of this decade. In my view, I must risk buying this signal to preserve the purchasing power of my dollars. Of-course Tuesday is the day that the Federal Reserve will raise interest rates again and the markets will react to their statement.

What does this mean for other financial assets? A year ago I vehemently wrote to sell real estate and everything on the triple sell signal. I did. I am worried that this 92-96 buy signal will auger for a continuing rise in real estate and that I have sold everything except for my home. But I've also learned that inter-market relationships are temporary and unpredictable. Interest rates used to rise with rising gold stock prices, but that relationship has fallen apart this decade. The dollar has risen for months but the gold stocks have also risen. I recommend that you don't use this gold stock buy signal for other markets. I am still expecting rising interest rates and a falling real estate market. I'm also guessing that the stock market won't fall apart while the gold stocks are rising, but that the stock market also won't be exploding upwards with the gold stocks.

When I buy, I usually anticipate an immediate (that's within one day) rise in the gold stocks. That is NOT the case with this signal, a long-term buy signal. In the late 1970s, the gold stocks stayed flat to up for a month before declining 10% and only then started their explosion (the system sat through a 6% loss). In the early 1980s, the 92-96 buy signal was followed by a decline of 9% over 3 weeks. In both cases, the 92-96 index did NOT sell. One had to sit through a loss before the explosion. In 1993 the gold stocks simply rose, immediately and continuously in a gradual manner. In other words, since the current 92-96 back prices will be falling, the current signal could be followed by sideways to down action for several weeks. Do not bet (via options, for example) that the gold stocks will instantly explode off of this signal. The only bet is that any price decline will NOT yield a 92-96 sell signal (and remember, those back prices will be falling, so a decline may not sell the system out).

I'd love to be able to buy and then go into a stupor for several months, only to be awakened by a 92-96 sell signal. I'd want to avoid watching the markets, because if we don't get 1 more down day, the gold stocks might scare the heck out of me before rising on the last possible day to avoid a 92-96 sell signal. It has happened before. USERX could easily fall back to the break-out at around 7.82 in the weeks ahead to scare the heck out of me (if they don't fall to there in the next few days). If you buy the signal, stay disciplined and don't sell unless the 92-96 index sells or we get a long and large rise.

Therefore, if we don't get the 1 more down days, I may only buy 50-75% on Tuesday and use any and every subsequent down day to add, to buy more. Adopt a buying strategy that fits your personality and that you can adhere to based upon what you know of your own emotions and the scenerios I have just outlined.. Do NOT buy more than you can afford! Do NOT allow yourself to (panic) sell on a decline that doesn't generate a 92-96 sell signal!

I have been waiting for a signal such as this for years. Such signals always occur, we just don't know how long we have to wait. And I promise (100%) that if this signal occurs and the rise ensues, that the market will decline into a sell signal at some time in the future. Hopefully, just not for many many months.

I've been writing these Updates for 5 years now. This appears to be the signal that I've been waiting for. Thousands of people are on the email list and even more are readers. Please put me in suspended animation after I buy so that I don't have to endure the pain/euphoria of watching. Just another day or two to wait. SKI's going to be a gigantic but anxious bull? I can't believe it, but that's the way it is. I sure hope this signal, which occured on Monday, will be correct (that's an understatement!). I am already having difficulty sleeping and I haven't even put any money at risk. Perhaps you can tell that emotionally I'm more anxious and worried than excited.

Simple translation of this Update: Buy gold stocks on Tuesday's close. Then sell on a 92-96 index sell or at a 100%+ profit. The maximum risk is a large 20% until 5 months after the buy day.

**************************** [Later in the day...]

SKI Update
8/8/05

CONCLUSION: I am waiting to buy until the first UP day (close) in the gold stocks. Will I get one soon?

I apologize if my suddenly frequent messages are disturbing, but this is
THE week. I only send these if it’s important.

I believe that I have an important handle on the gold stocks this week and this is bull vs. bear time in a big way. The master 92-96 index buy signal has, of-course, been generated today for (buying at) the close tomorrow (Tuesday, 8/9/05). I am writing this before the stock market closes in the U.S., but I’ve watched the gold stocks open the day higher only to sell off as expected.

I continue to expect that the gold stocks will decline tomorrow for the fourth straight down day into the signal (but note that it is rare for the 92-96 index to buy at a low, reinforcing my recommendations below). The 92-96 buy signal indicates that a bull market has started, but it is not always timely or correct. It’s perfectly fine to buy tomorrow’s close and then to use a 92-96 index sell signal as the stop, but read on please.

I am writing to emphasize one scenario that I stated in this weekend’s Update. It’s the one where the index buys and then sells quickly at a small loss. That is a perfectly common and reasonable possibility. If tomorrow’s anticipated decline continues for another day or two (depending upon the size of the decline), the index may just sell quickly at a loss. There is no rule that says that the decline has to end at 4 days down. Such runs usually end at 4-5 days, but there have been times when they’ve extended to 10 days down. For example, the one real loser out of those 92-96 index trades listed above continued for 9 days down.

Therefore, I am going to wait to buy until the first up day. That is the logical strategy: I may buy a little (2%?) higher than the index, but the odds of being correct will be extremely high, and if I “only” make 148% instead of 150%, what’s the big deal? Remember how I always write that I am risk-averse, that I try to avoid large losses. I want to avoid the possibility of losing 2-5% on this buy signal in 2-3 days (even though 3% is not a “large” loss).

It is rare for the 92-96 to 'buy' at a low, and that 3 Down and 5 Up run into last Wednesday’s high just might be a major high. So, I will hedge a little. If the gold stocks go up tomorrow (8/9/05), then I will buy 75% and add a little on each and every down close. If they go down, as expected, then I will delay buying until there is an up day. And if you don’t have the luxury of being on vacation from a university (me) and watching these goldies during the day, then you can just buy as soon as possible, the day after an up close.

I’ve discussed this with my colleague and his conclusion is that I am being logical and analytical. He stated that he does not hear my sometimes emotional tone. I strongly recommend what I am suggesting: Be prepared to buy, but wait. If the gold stocks unexpectedly turn up tomorrow, I will be buying. If they continue down into a quick 92-96 sell signal, then they may also generate the 35-39 index sell instantly (those prices are also at 7.62 now) and SKI will remain bearish. Why does SKI suggest delaying? This time I’d truly say it’s NOT that I am being “chickenski”. It really is wisdom gained from experience. I am now calm because I know what to do.

P.S. After I’d written this weekend that I was worried that real estate
hadn’t been going down, I read the excellent site
http://truecontrarian.com/ only to become aware that last
Thursday-Friday witnessed an extraordinary drop in real estate related
stocks!

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx