Important Inflection Point

As the HUI is set to test its downtrendline today, we face an important inflection point. The HUI needs to confirm the downtrend break already achieved by the XAU and the GDX. Although there are a couple of yellow flags, I believe that the HUI will shortly break its downtrend and follow the XAU and GDX higher.

The yellow flags are the following:

1. Non-confirmation by HUI of the downtrend break in XAU and GDX.

2. Low to moderate volume in the GDX following downtrend break and little follow through in XAU or GDX downtrend breaks.

3. Gold tentative having gained relatively little since the USD breakdown.

Although these flags are noteworthy, I think they will not preclude a downtrend break by the HUI in due course.

First of all, we need to understand why the HUI is showing a non-confirmation today; why is it still below its downtrend line? The main reason is because of its outperformance in September, which cratered a less steep downtrendline due to the September spike up which had not been confirmed by the XAU. In a sense, to attach major significance to the HUI's non confirmation thus far, would be like punishing the HUI for being extra strong in September. In this sense, you can sense the sometimes arbitrariness of the angles of trendlines.

I think it is significant that the traditionally weaker XAU broke out, rather than the stronger HUI. Usually it's the XAU that needs to confirm the break out in the HUI, rather than the other way around. I think it's a bit upside down to argue that the stronger index has to confirm the weaker one.

Second of all, the situation we face today is completely different than the one that we faced in September. In September, when the XAU didn't confirm the HUI, the HUI had surged on expectations of strong seasonal demand, which failed to materialize, and ion the face of a recent downtrend break in the USD. Today, we have strong seasonality AND a major breakdown in the USD, the type of breakdown from which we are unlikely to see a strong recovery since it sliced through major support. That is a significant difference and provides a reason for the HUI to go higher this time.

Finally, we have the action in the GDX. Although it hasn't shown a surge in volume, it has shown steady accumulation the last few days, accumulation which it hasn't seen in months. (I can't post the GDX chart at the moment due to a technical issue.)