The Great Panic of 2008 and the enormous plunge of the HUI then has arguably provided the setup for the mother of all Cup with Handle (CH) technical formations for Big Mining Equities. Chart loving technicians are focused laser like on the Amex Gold Bugs Index (HUI), the last of the “non-confirmations” for gold’s historic rise to new heights, as the popular gold stock index is threatening to break out. Wouldn’t you know it; the mother of all CH patterns is actually a smaller CH within a massive one!

Here’s the setup graph for a visual reference:

Continued…

We’ll pick this up in just a moment, but first, gold acted like a caged tiger yesterday (Monday), restlessly rambling in a narrow, mostly lower tight space, but refusing to lay down more than a little. This morning as we write at 05:00 gold has thrust up to the $1,320s again with silver “answering back up to the $22.20s. This, as the Bank of Japan announced even further monetary easing. As of this moment the gold/silver ratio stands at 59.6 and silver is edging closer to the point where a runaway breakout becomes not only possible, but likely. The sell side in the futures pits better bring out the big guns this morning in New York, or they could be in full blown retreat by lunch.

The action has us pondering the HUI this early Tuesday. The HUI tracks an index of 15 of the largest miners of gold, silver and copper. All three metals have seen strong up moves, but as of Monday, October 4, the HUI has yet to “confirm” those gains. It has been more than two years since the HUI has redefined the upper limits of resistance, or what we call a Definition Move.

Taking a few liberties with the “rules” for CH patterns, note then the huge CH which we argue has developed for the HUI in the chart above. We believe the Cup with Handle formation was first popularized by William O’Neil in his book “How to Make Money in Stocks” in the late 1980s or early 1990s. In order for a CH to be a “bullish continuation pattern” a prior up trend must have been in place.

Check. The uptrend for the miners had been in play since 2002 before it was rudely interrupted by the 2008 Panic. If we were to consider the rest of the accepted criteria for a CH pattern, then the historic plunge of the HUI in 2008 is too large to qualify. However, one of the beautiful and pleasing aspects of charting is that each veteran chart playing trader can modify or amend the “rules” based on his/her own read of today’s observations and based on what works for them!

If we were to use generally accepted CH parameters, the bowl portion of a potential CH pattern shouldn’t be more than a 50% retracement. With 2008 having just occurred, we have to throw that rule out or at least bend it, but what the heck, this is charting, not legislation.

What we think is particularly interesting about this mother of all CH patterns (MACH) for the HUI is that it looks like to us that the MACH is threatening to break out with another, smaller CH!

Have a look as we zoom in to just the last year and a half below:

We’ve no prediction as to whether or not the HUI will actually break out and redefine a new, higher resistance in the near future, but it sure does look promising this Tuesday morning. If it does break out it will make some technical mavens happy. Specifically the chartists that specialize in cup and handle breakouts.

With earnings season approaching, given the higher prices of the stuff the miners are digging, we would not at all be surprised if this is the month that the HUI finally does begin a redefinition of upper resistance – if the world manages to hold itself more or less together.

Want to know if the breakout is “believable” should one develop in the next little while? Watch the volume. A convincing CH breakout should be marked by increasing volume. The higher the more believable.

http://www.gotgoldreport.com/2010/10/hui-cup-with-handle-threatens-breakout.html