Today's Market WrapUp 01.25.2007 Mon Tue Wed Thu Fri Goldberg Archive HUI
and the Homebuilders
Both the Gold Bugs ($HUI) and the Dow Jones Home Construction ($DJUSHB) indices are now in critical stages of their technical chart patterns. The technical chart patterns of homebuilders, which are in a long term bear market, suggest a bear market rally nearing completion if it is not already done. The $HUI is in a long term bull market, but the intermediate term action suggests continuation of a corrective pattern. Looking at the $HUI first, below is the long term picture showing the proposed Elliott Wave pattern in blue roman numerals referenced many times before. Wave I was completed in 5 red sub-waves occurring from late 2000 to late 2003. The $HUI then went into a long term corrective pattern (Wave II) lasting from late 2003 to the summer of 2005. Wave III began in the summer of 2005 whereby Wave 1 within Wave III began in the summer of 2005 and ended in early 2006. Wave 2 of Wave III so far has been a wild and difficult correction to trade, as the $HUI has zigzagged between a wide range between 275 and 400. Although proposed Wave 3 of Wave III promises to be a rapidly profitable phase of the bull market, deciding when it gets underway has been, and is likely to be a significant technical challenge.
A closer look at the Wave 2 correction is in order in the form of the three year weekly chart. The most salient trendline shown in the chart is the downward sloping blue line. Note the whipsaw in the fall of 2006, where it appeared that Wave III was underway. But after about 10-days of excitement for gold stock bulls, they were frustrated when the $HUI put in 4 out of 5 decisively down weeks. Over the last three weeks however, gold stocks rallied once again, and as this piece is being written, the $HUI sits at the confluence of the 10 and 40 week moving averages, and almost exactly at the downward sloping intermediate term trendline.
Is there anything to be gleaned from the shorter term action? Below is a 60-minute chart dating from the end of November 2006 to the present. It appears that in the shorter term, 340 represents an important technical resistance level. Referring to both the short and long term charts, 365 is longer term resistance, which if broken to the upside, would likely signal the beginning of Wave III UP in gold stocks.
Likely to be important to the short term direction in gold stocks is the leaders of the silver mining sector – Silver Standard (SSRI), and Pan American Silver (PAAS) – which are also at a critical technical stage. They have both tried to break out into new high ground today, but were at least temporarily turned away by an apparent liquidity dry up which also seems to be affecting stocks, bonds, oil, and commodities today. While breakouts would be bullish for the entire sector, failure to break out would likely frustrate long term precious metals stock bulls yet again.
Several leading gold stocks still remain well off of their November highs. In addition, the action in popular but lagging Newmont Mining is also relevant to the action within the gold mining sector. As gold stocks tried to break out in November, Newmont was challenging former support/resistance levels. Now it appears that its (lower) 10-week moving average is relevant. (It was turned away from this important benchmark earlier this week.)
While the precious metals stocks are in a long term bull market and an intermediate term bearish correction, the homebuilders are in a long term bear market and an intermediate term bullish correction. Here the technical picture appears clear to me. A sharp short covering rally was topped off by an analyst upgrade of the homebuilders by Goldman Sachs. The rationale? Things are going to be tough in ’07, but much improved in ’08. Quoting the Mogambo Guru, “Ha Ha Ha Ha!" In any case, the action around the head and shoulders neckline is critical. In spite of all of the bullish Wall Street talk, as I write this, the Home Construction index appears to have failed near its neckline. A new round of analyst upgrades is needed.
An important stock to watch is household name, Toll Brothers. While it appeared that TOL made it into intermediate term high ground on the Goldman Sachs upgrade Tuesday, it then made a bearish reversal apparently on economic data.
There is similar action in Ryland homes, with an apparent failure right upon its neckline.
Particularly weak are the builders whose western US business predominates, such as Centex Corp. (CTX). In spite of bullish price action during the short covering rally, the stock is in an intermediate downtrend and now is challenging its 50 week moving average. The price rally was not confirmed by money flow, and it is unlikely that Goldman Sachs will upgrade homebuilders again. (This is not to say that some other well respected Wall Street analysts cannot come up with a bull(ish) story sufficient to rally these stocks for a few days.)
Today’s Market Today was marked by a distribution day throughout the entire stock market. As suggested by Marc Faber in the Newshour interview (a must read or hear), “If the emerging markets start to perform badly after their strong outperformance it’s kind of the canary in the coal mine. In other words, that would be the first signal that liquidity is somewhat tightening.” Of course, one day does not a market make, but it is notable that while the major US indices were down sharply by today’s standards, the emerging markets ETF was down over three percent. The DJ Home Construction Index was down by 3.25 percent and in spite of the rip-roaring Goldman Sachs upgrade, most of these stocks sit upon their weekly lows. We now are approaching Superbowl Sunday, the completion of which marks the beginning of the residential selling season in the temperate parts of the US. Clearly the Goldman Sachs upgrade was designed to get investors to look past ’07 – quite a task for a market that appears to discount only the next day’s press release. The S&P 500 put in a daily engulfing pattern, confirmed with high volume. Further down action would put a lot of short term speculators in the red and this would provide additional downside momentum in the days ahead. The cynic in me is expecting the famous Goldman analyst to proclaim (yet again) in the press that the S&P 500 is perhaps 15% undervalued.
Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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