LONG TERM
It's been another interesting week in the gold markets. Since I get my data from the futures trading information this requires changing the contract month for the data as time progresses. This, at times, skews the charts at the time of changing of the month. We are at a critical position, especially from the intermediate term basis as mentioned last week. Although my charts now reflect the changing of the contract month to the April contract (on the COMEX) I am still keeping an eye open on a chart that continues with the February data to see if there is a real difference of results and trend. So far the change has not really affected the technical position of gold, either long term or intermediate term.
The long term P&F chart (not shown) just keeps on moving higher. The actual price came within $0.50 of the price projected back when the bull first started (although the plot shows $570 the high price on the week was $579.50 but we could not put an X yet in the $580 square this being a P&F chart with whole $10 units). We also have the $600 projection from the recent break. As mentioned in earlier commentaries, once we are through that next projection we are then into no-man's land as far as further projections are concerned, i.e. into levels never before seen. But we will take one thing at a time. The interesting trends on the P&F chart are the resistance up trend lines. The primary line has deflected most action as it got close while the secondary line has held back the rest. The suggestion here is that there is not much more upside left to look forward to unless we get a considerable amount of lateral movement.
As for our normal indicators, as can be expected gold is running away from its long term positively sloping moving average line with no thought of any long term reversal for some time. Price momentum is also quite positive but there could be too much of a good thing. We are at a point with the momentum from where earlier trends came to a halt and did not recover for almost a year after. So although the momentum is positive it is providing a bearish warning. The volume indicator continues to confirm the positive price trend and no problem here.
On the long term the prognosis is BULLISH.
INTERMEDIATE TERM
First a look at the P&F chart. The chart shown last week had turned around and moved into new high ground giving us a new intermediate term projection to the $615 level. As the bull trend continues sooner or later these new increased price projections are going to be false and not met. When will that be? We'll just have to go with the tide and see what happens. It might even be this week.
Now the real interesting story that has been unfolding these past very few weeks. That is the Merv's FAN Principle trend lines. Shown on this week's chart is the Merv's Bearish Accelerating FAN trend lines numbered 1, 2 and 3 in order of their upward accelerating trend. A real quickie explanation on this concept is in order as most have never had a chance to review my whole FAN Principle technique. I intend to have it posted on the www.themarkettraders.com web site but that is taking longer than expected so here is a quickie summary addressing the bearish accelerating fans.
The basic FAN Principle requires 3 FAN trend lines. These are always drawn as you would normally draw trend lines. The normal decelerating bearish FAN trend lines are drawn from the same apex point and results in an image of a real fan. This is the long drawn-out topping type of action. The accelerating bearish FAN trend lines are drawn from increasingly higher levels along the trend. When the initial up trend starts to accelerate and leave the initial up trend line behind (line 1), we then draw a second more aggressive up trend line (line 2). Should the trend then become even more aggressive and runs away from this second trend line there may come a time to draw a third FAN trend line. Once the trend has made new highs this third trend line now becomes very important. This aggressive trend cannot normally continue for long. It is often called a "blow-off" stage as it blows off all its steam and collapses. Although the breaking of a third FAN trend line is often not serious and only a warning (the breaking of the second FAN trend line gives us a trend reversal signal with the breaking of the first as a confirmation) the breaking of the third accelerating bearish FAN trend line IS SERIOUS. It very often defines the end of a trend and does so near the very top.
So this is where we are at. There are a few additional bearish indicators to confirm the prognosis that we are very close to the end of an intermediate term trend. Although the price was making new highs the price momentum just couldn't get any steam and just moved sideways, at best, with no new highs. The volume indicator has dropped below its intermediate term moving average line and remains there. The moving average line is sloping downward for another bad sign. And the daily volume action is very serious. During the recent highs, as the price trended sideways with little upward movement the volume level was very high. When the price did finally move into new high territory the volume dropped off significantly. All danger signs after a significant advance.
If I was of a mind to jump the gun and try and guess the top, it would be right here. All the signs are there for a reversal to start. However I will wait for the third FAN trend line to be broken and the price close below it before issuing an intermediate term bear signal. So, as long as the activity stays above the line number 3 we are okay. Drop below the line and one might run like hell for cover. One might ask how low would gold go in a case such as this. Well, there is an excellent chance that the action might trap itself between lines 1 and 2 for some time. But the correct answer is unknown and we would have to follow right along with the trend as it develops and progresses.
Technically, setting aside the FAN Principle analysis, gold is still in a very good position being above its moving average line and momentum still in the positive zone; volume action being the greatest negative as far as the normal indicators are concerned. So, gold is intermediate term BULLISH except that I would go bearish on a close below the indicated third FAN trend line.
SHORT TERM and IMMEDIATE TERM
The short and immediate term analysis can be found in the subscriber's section of Merv's Precious Metals Central at www.themarkettraders.com.
U.S. DOLLAR INDEX
Just a quick word about the U.S. $ Index. It has often been said that over time the $ and gold move in opposite directions. Without going into any great detail here, many might recall my US$ P&F chart some time back. It showed the long slide, the bottom and the new up trend. Well, it is still in the bullish up trend mode from a long term basis and just might be on the verge of continuing its upward trek. I may come back to this point in a future commentary.
Most North American gold indices moved higher this past week although the FTSE Gold Mines AMERICAS Index seems to have stumbled. The S&P/TSX Capped Gold Index was about the average of the Indices moves. This S&P/TSX Index seemed to peak out over a year before most other Indices peaked out and had been moving sideways for that much longer than most. Only recently (within the past year) has this Index started its move. Of concern is the high level of the momentum indicator. It is approaching its level of 2002 when the previous up trend halted. Also of concern is the past week's action. The candlestick almost looks like a reversal of trend indication having moved up and down but closing at its weekly low. The high volume with little weekly movement is also not good. This just feels like a reversal of trend ahead, or maybe I'm letting my FAN analysis for gold get the best of me.
Another positive week for the Merv's Indices (except for the Spec-Gold Index) and once more the leading gainer was the Spec-Silver Index. Looks like more and more speculators think that silver is the place to be rather than gold. If one simply looks at where silver once was versus where it still is and compare it to gold one might just get the idea that silver has far higher potential than gold. But one must remember the reason silver was in the $40s and $50s back in 1980 and that reason is not present - yet. That was, of course, the Hunt brothers attempt to corner the silver market and the resulting industry cop-out getting themselves out of a bind. Anyway both have huge potential on the up side so although it looks like silver has the edge right now who knows what tomorrow will bring.
MERV'S GOLD & SILVER 160 INDEX
I always start with my universe of 160 gold and silver stocks to see how the overall sector is doing. The average gain here was 1.7% on the week. There were just a little more gainers than losers with 83 issues up and 72 issues down on the week. Quite a reduction from last weeks 127 up and 31 down. One week does not a trend make but a trend always starts with the first week. Looking at a Zoomed in chart of this Index one sees the steep slope of the Index over the past few months. This steep climb cannot last and must come to an end sometimes, maybe even now. We'll just have to wait for it. With an intermediate term BULL/BEAR rating of +86%/-11% there is still no immediate danger of a serious reversal of trend. Speculation has subsided significantly with only one stock in my over/under 30% level.
The best performing stock this past week was Bralorne Gold Mines Ltd. with a gain of 34.4% on the week. Bralorne was recommended to subscribers in late November when it first turned POSitive in our technical tables at $1.10. It is now ahead 85% in the past 2 months, since recommendation and turning POS.
MERV'S QUAL-GOLD INDEX
The 30 quality stocks did quite well for themselves this past week. Their performance was slightly better than the overall average but more importantly was the fact that there were twice the number of gainers versus losers (20 to 10). The intermediate and long term bullish ratings are still up there in the 90% area so no sign of a reversal yet. The short term rating has come down a little but nothing yet to worry about. The Stochastic Oscillator, an aggressive momentum indicator using weekly data, is still way up there in the overbought zone where it has been for some two and a half months and not showing any sign of coming down.
MERV'S SPEC-GOLD INDEX
The top 30 of my speculative group (the 30 stocks with the highest market capitalization after the Qual-Gold group) did not fare so well. It was the only Merv's Index that had a loss on the week. It was not a loss due to a crummy performance of one or two stocks but a general weakness in the group. The losers outnumbered the gainers by 17 to 13, the only group with more losers than gainers. Is this group a leading indicator group? I don't think so but still they are going counter to the general trend. Despite the loss the intermediate term rating is still 85% bullish so the group has some distance to go before reversing the overall bullishness.
MERV'S GAMB-GOLD INDEX
Well, some group had to be the winner and it is the gambling variety of stocks again. This group of 30 gambling stocks gained 4.0% on the week, more than double the gain of any other gold Index. It was not all roses since we did have 11 losers with 16 winners but the winners were mostly double digit winners while only one loser was double digit. The intermediate term bullish rating for the group is still way up there at 93% with the long term rating at 100%. Nothing subtle about this group. The only problem here is the very steep nature of the Index over the past few months. This steep rise in Index value cannot go on much longer and I do see potential problems ahead. This is no rocket science but a realization that no Index can continue as this Index has and not reverse for a while.
MERV'S SILVER INDICES
This seems to be where the action is as far as the gold and silver groups are concerned.
MERV'S QUAL-SILVER INDEX
With a gain of 2.8% the Qual-Silver Index did a lot better than most quality Indices. 7 of the 10 stocks closed on the up side while only 3 closed on the down side. The bullish rating for the group is still at the 90% level for both the intermediate and long term. All is well with the world except for my comment against other Indices as to the longevity of the bull.
MERV'S SPEC-SILVER INDEX
This is the Index with all the good things going for it, especially the speculative sentiment of speculators out there in investment land. With 17 gainers and 7 losers this group had the best gain to loss ration of any group. The Index itself is now up some 150% since its low last May. Can it pull off another 150% gain from here? With about the best record of Index movement it is a surprise that the bullish ratings are not all up in the 90% level. The long term is but the intermediate term is only at a bullish 88%.
That's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
5 February 2006
During the day Merv. practices his engineering profession as a Consulting Aerospace Engineer. Once the sun goes down and night descends upon the earth Merv. dons his other hat as a Chartered Market Technician (CMT) and tries to decipher what's going on in the securities markets. As an underground surveyor in the gold mines of Canada's Northwest Territories in his youth, Merv has a soft spot for the gold industry and has developed several Gold Indices reflecting different aspects of the industry. As a basically lazy individual Merv's driving focus is to KEEP IT SIMPLE.
To find out more about Merv's various Gold Indices and component stocks, please visit www.themarkettraders.com and click on Merv's Precious Metals Central. There you will find samples of the Indices plus other publications of interest to gold investors.