There are two patterns I’m watching very closely on the HUI which will be a proxy for the rest of the PM stock indexes. This first chart is a daily chart which shows the three small consolidation patterns that have formed since the January low.
The top pattern basically completed its fourth reversal point yesterday which is an expanding falling wedge. One of two things will most likely happen today:
- If this is the correct consolidation pattern, then we will most likely see a breakout gap above the top rail which should lead to the next impulse move up.
- The second scenario would be to see the top rail hold resistance and a move down to the bottom rail of the expanding falling wedge where the 38% retrace would come into play around the 183 area. This pattern is complete except for the breakout.
Below is another daily chart we’ve been following which shows a possible bigger consolidation area forming, with the second reversal point coming into play at the top of the trading range. If—and that's a big if—the top of the trading range does hold resistance, we’ll need to see one more decline toward the bottom of the trading range. This would complete the 3rd reversal point, which would then set up the all-important area to begin the fourth reversal point back up to the top of the trading range, to complete whatever consolidation pattern develops.
We won’t know what pattern we have until we have the four reversal points in place. As bullish as this sector seems right now, it’s hard to imagine that big gap getting filled—but it’s a possibility. There are no laws though that say the gap has to get filled, it’s just that most of the time they do get filled at some point.
This next daily chart for the HUI is showing the most bullish pattern we could possibly ask for. The initial rally that began at the January low and took us to the April high could be called a flagpole. Whatever consolidation pattern we get starting from the April high would be called the flag.
The blue trendlines show the two most likely patterns that may form the flag. I’ve also added a horizontal dashed line at the top and bottom of the trading range that would show a rectangle. So there is a possible triangle, falling flag or rectangle that could form the flag.
The most important thing to watch right now is what happens up at the top of the trading range.The blue arrows would measure the halfway point from where the last reversal point takes place in the bull flag. The higher the last reversal point, the higher the price objective.
If the HUI gaps up big this morning then the first chart we looked at, the expanding falling wedge, will most likely be the next consolidation pattern that leads the next impulse move up. The bottom line indicates to be prepared for either scenario.
I’ve also been watching the TSX Venture Composite Index (CDNX) for clues, which may have given us a big one yesterday. I waited for the end of the day to see if the price action held above the top rail of its small blue rising wedge. It did and closed at the high for the day.
The blue bullish rising wedge would equate to the first pattern we looked at on the HUI, which was the falling expanding wedge.The blue arrows measure the first impulse move up that was separated by the bullish expanding rising wedge as the halfway pattern.
The red arrows measure the second impulse move up, if the blue bullish rising wedge works out as a halfway pattern. The rally would probably last four to five weeks before the price objectives are reached. Have your favorite PM stocks ready to go in case this scenario plays out.
