The HUI Friday Mystery

There was a bit of a mystery last Friday centered around the Amex Gold Bugs Index (the HUI.) After gold plummeted and then reversed that day, it ended barely up. On the other hand, the HUI gained 5.28%. This five-day chart, from Yahoo! Finance, shows it:



There's an old charting rule that says a gap, in this case a difference between one day's price range and the next day's, must be filled. (There are exceptions, as explained in this Stockcharts.com article about gaps.) At first blush, that's what's happening here. The HUI gapped down on Thursday and the gap was all-but filled on Friday.

What's odd about it is the fact that the SPDR Gold Shares Trust (GLD) showed a similar gap on the same day, but is nowhere near to filling it:

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GLD not only failed to fill the Wednesday-Thursday gap, but also failed to make up Thursday's losses. The HUI closed on Friday above Thursday's high point; GLD didn't even close at Thursday's mid-range.

For someone who thinks that the HUI serves as a leading indicator for gold itself, both charts indicate that GLD will fill its own gap next week by moving up at least $4 per share.

The HUI chart over the last six months, from Stockcharts.com, shows a steeper decline these past two months than gold itself:




Leverage does work both ways, as this ratio chart of the HUI divided by gold shows:



However, that last chart shows a bottom that's different from gold's and the HUI's. The ratio hit its bottom right on February 1st; the others bottomed on Thursday the 4th. That non-confirmation of the standalone charts suggests that gold and the HUI are both due for an upward bounce. Although gold didn't hit the oversold level in the RSI indicator, found at the top of each of the above three charts, the HUI touched it on Thursday. That helps explain the HUI's unexpected rise on Friday.

Note that there hasn't been an earlier divergence in lows with respect to the ratio chart as compared with both its components. A check of the three-year daily shows that the sudden-reversal pattern has exerted itself in that timeframe too, until now.


Something to mull over during Super Bowl time if your mind's not on the game...