ABX has moved up at a much faster speed than we ever expected. Typically there should be a noticeable pause somewhere, usually near the middle, of the counter-trend correction. We have now almost retraced 50%, far more than most other gold stocks so we have to assume that our analysis was wrong.

Initially we expected a pull back after the first leg up to about $17. What may have happened is that the pull back (wave b in an a-b-c) simple moved sideways rather than down. Possible this was an expanding triangle wave b that lasted about 5 weeks. If c started from that low point, equality between c and a would get us to somewhere near $28/$30 in the next few days, if not done already. If so this correction would have lasted about 8 months which is very short compared to the 4 years it took for the stock to find a bottom.

By comparison we show the ZJG, the BMO junior gold ETF.

This one is also on a semi-log scale but the stock only just made a 30% retracement. Clearly ABX is ahead of itself and today’s action up $2 in the morning (when the charts were made) and down $2 in the afternoon may be a warning that it is peaking at some degree.

We have been very lucky with our predictions for ABX. All though not absolutely perfect we did manage to capture the main moves and draw a tradable map. What is next?

First of all, the drop from the highs in mid 2011 is undoubtedly either a single 5-wave leg down followed by a single 5-wave corrective up move, OR a complete A-B-C correction that retraced about 85% of the value of the rise from 2001 to 2011, give or take. We preferred the former interpretation but are not at all confident about that. If the latter interpretation is in fact the correct one, then we have completed an initial wave 1 up and are presently in wave 2 (see the beige annotations). In either case we are confident that an initial wave (one or a) is complete. This is because the diagonal wave 5 or C is completely retraced plus a bit in a rather violent manner.

    Furthermore, looking at the technical indicators, it is interesting to note that the RSI peaked out more than a month ago. More interesting than that is that this has happened 7 times before during the time of the above chart, and that in every instance without a single exception, the RSI would move from the overbought extreme to the oversold extreme. This is the 8th time and it has not done so yet. We therefore still believe that this wave b or 2 has further to go, perhaps to about $14.50 or so (about where the 200 day moving average will be at that time). At that point it would be a screaming buy under BOTH scenarios! From there wave c or 3 should take us to roughly $32 or so, again under either scenario. The beauty of this forecast is that you do not have to go to the edge as it does not matter all that much whether you buy at $17 or at $14, if it gets there, because you will make a very healthy return in any event.

   As a word of caution we want to make it clear that this is an unadulterated EW analysis without ANY fundamental inputs. If you see how fast the fundamentals changed two or three months ago, you must conclude that they are irrelevant in terms of predictive value. Like a herd of buffalo the gurus will run over a cliff without batting an eye, or alternatively, they always have only one outcome in mind at all times and that is straight up.

Please see our previous blog of two to three weeks ago. We recommended selling at about $22. which I am sure nobody has done. It is always good to leave a bit on the tble for the next guy/gal.

We have done 5 waves up, reached the top of the diagonal and both the RSI and MACD are  deteriorating rapidly. Furthermore you have almost tripled your money. A solid pull back should lie ahead, perhaps about $8 or half of the gain. It should unfold in an a-b-c after which the C leg could add an equal amount again and take the stock to about $32. We will see.

The usual then, little more than a month or so ago, and now charts;

Looks like we are well on our way towards $23. That is the top of this “diagonal” and I suspect the end of wave A of a much larger A-B-C. That B should drop to about $15 and then the C can take the stock as high as $35. After that it may be game over for the gold stocks, we will see.

   In the mean time keep your eye on the RSI as it is getting right up there. As we said in the Feb. 1 blog, $22 is probable a good exit point – do not forget that golden rule of trading; always leave something on the table for the next guy. You can try to buy it again at about $15. In the mean time you will be able to tell your neighbour that you made a whopping 175% in a little over 1/2 a year. That is 560% per annum compounded, all from a free blog!