HUI - Correction over!

By Eric Hommelberg Dec 18 2007 10:19AM

• Gold/HUI ratio chart flashes 'BUY' for HUI
• HUI approaching very strong support

The HUI faced a severe sell-off last week and is trading now as if gold were trading at $650 levels. Such huge anomalies never persist for a long period of time so what gives, or we should see a sharp decline in the gold price or the HUI will catch up sharply from here. We've been through all this before in August of this year. The HUI was trading at levels as if gold were trading at $550. The HUI was a screaming 'BUY' at that time and rocketed all the way up from 300+ pts towards it recent high of 460. (see a also my piece 'HUI - bottomed out, poised for take off!' of September 03).

As said above such anomalies never persist for a long period of time. The Gold/HUI ratio chart is an excelent indicator for such anomalies and flashes a 'BUY' again these days. Let's take a peek at the Gold/HUI ratio chart first:

The Gold/HUI ratio chart flashes a 'BUY' again indeed. Again, the Gold/HUI ratio chart points to severe anomalies between gold and the HUI. This becomes clearly visible when we plot the charts of gold and HUI on top of each other.

Again we see the severe anomaly between gold and the HUI. The HUI sell-off therefore seems to be way overdone and generates a unique 'BUY' opportunity here. Now let's take a peek at the HUI technicals and see what they say:

We see here that the 395 - 400 support area didn't hold and that the HUI has approached a very strong support area in the 360 -370 range. The 360 - 370 range has served as a long-term resistance for more than 16 months and serves now as strong support indeed! Furthermore it should be noted that the HUI is pretty much over-sold so further down-side risk seems almost non-existant.

Sure enough the nearby future of the HUI depends on the nearby future for gold so let's take a peek at the gold chart below:

In fact nothing has really changed, no uptrend has been broken and the current AB Flag formation simply has to resolve itself one of these days. If it can resolve itself to the upside then the HUI is in for a spectacular move to the upside.

Now where to go from here?

If you are a believer in gold's future then these are the time to increase your gold share positions since the gold shares are still selling at fire sale prices. In other words, downside risk is low. Higher gold prices the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.

Best regards,

Eric Hommelberg