Technically Speaking with Burak
Weekly Commentary
(For week ending 10 February 2006)
Mervyn Burak, CMT
Hey! Don't blame me, I'm just the messenger. Once gold dropped, so many didn't know what to do and got trapped trying to pick the short term turn around. It lasted only one day, how's that for short term? Where to now, you ask? Let's see if we can guess.
GOLD
LONG TERM
I have shown this situation before. What we have is a reoccurring peak in gold followed by about ¾ of a year of negative/lateral action before once again climbing to new highs. We are at this point again. Each time, the peak occurred near a year end, give or take a few weeks. In each case except one, the long term price momentum was just about touching its overbought line, the 70% line on the long term momentum. The only time it was still some distance from the line was late 2004 but the whole period from early 2004 to late 2005 was a weak period as reflected by stock activity. So here we are. What do we do? Let's go through our normal process and see if this is in reality the same situation or not.
First, as always, we look to the long term P&F chart (not shown here). Here, we are still far, far away from any serious long term trend reversal. Unless we have some serious lateral action along the way it would take a move to the $450 level to activate a trend reversal on the P&F chart. So, from the long term P&F view, no problemo hombre.
How about the normal suspects. What are they showing? Well again, from the long term point of view no problemo hombre. The price is still well above a long term positively sloping moving average line. Price momentum is very positive (maybe too positive but that's a different problem) and could come down considerably and still remain positive. As for volume, it has been trending lower for over a month now, one of the signs that we were possibly into a top in gold. However, the volume indicator is still above its long term moving average line for a positive reading.
Putting everything together, although my FAN Principle (discussed last week) has indicated a bear market (intermediate term) we continue in a long term BULL market. However, one should realize that gold could drop some distance while still remaining long term bullish. That is what I am expecting at this time.
INTERMEDIATE TERM
For some odd reason I have received many requests for the full Merv's FAN Principle criteria. I had promised to publish it on the www.themarkettraders.com web site, where my gold service (with great recommendations even if I say so myself) is hosted but have been side tracked and have not had time to put the presentation together in a form I would find acceptable for publication. Bear with me, I will get it on the web site eventually BUT I do have just too many things needing attention.
As mentioned last week, the bearish accelerating FAN third trend line basically lets you know the end of the trend, and very close to the top. I think you will agree with me that you couldn't get much better then this. However, the question becomes "Is it REALLY the top and are we REALLY in an intermediate term bear market?"
From Merv's FAN Principle a basic criteria is that once you have a reversal that reversal remains unless the action reverses and crosses back above the previous FAN trend line, EXCEPT for the accelerating bearish reversal. Since the trend line was so aggressive a reversal and move above the previous line is almost impossible so the criteria for a false signal is a move above the previous high. So, by the Merv's FAN Principle we are in an intermediate term bear unless and until the price reverses and moves into new highs.
As for the P&F chart, we have not yet made it to a reversal stage. Should the price continue lower to $540 then we would have a P&F reversal confirmation. If the price does not continue lower we will have to follow the action and see where it goes. Should it break down then the projection would be to the $475 level (which would still be above a long term reversal point).
As for the normal indicators, the price is still above a positive sloping moving average line. At the present it would need a close somewhere around the $540 level to be below the moving average line and have the line reverse to the down side. Price momentum is still positive but moving lower. It had already shown a negative divergence versus price action so this indicator is a very weak positive indicator and may not last much longer as such. As for the volume indicator, it is moving lower, below a negative moving average line. The daily volume action will be reviewed in the short term analysis.
Apart from the Merv's FAN Principle, the P&F and the other indicators are still giving us a BULLISH prognosis although with a definite negative bias.
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
You might call this a space filler. Many of my readers from last year will recall this chart of the U.S. $ Index. It showed a primary long term down trend line and a secondary line whose validity was confirmed on several occasions by the action just touching the line and then reacting. Some may recall that I was probably one of the first to warn of a long term trend reversal to the up side in late 2004 right at the bottom at the 81/82 level due to a strong positive divergence in the price momentum versus the price action itself.
An interesting point about the chart. The initial break in early 2005 gave us a projection to the 93 level. The U.S. $ Index is still long term bullish. Should the move continue and hit the 93 level it would overcome a considerable amount of resistance and then project to at least the 117 level, which is near the previous high.
Does anyone spot the Reverse Head and Shoulder pattern on the chart? It should be easy.
Just something interesting.
NORTH AMERICAN GOLD INDICES
Taking turns in looking at the major North American Gold Indices it's the turn of PHLX Gold & Silver Sector Index to be looked at this week. After a very good run for the past several weeks all the Indices finally had a lousy week with losses of 6.0% give or take a fraction. A couple of the lesser Indices had losses of 8% but they only had one to three component stocks so their performances were not representative in any way of what's going on in the real gold world.
Despite the fact that gold closed slightly above its Tuesday plunge level XAU closed the week below its Tuesday level. The Index is showing greater weakness than gold itself, which is to be expected due in part to the "magnification" effect between gold and stocks. Despite the drop XAU has still not moved below its intermediate moving average line but has moved below its short term line. The short term line has also followed suit and has turned down. For those interested we can draw the same FAN Principle trend lines on XAU as we did on gold itself. Try it for practice.
Momentum is still positive although losing steam rapidly. Momentum is moving lower from almost its 70% level and of particular note was NOT in a negative divergence situation with the Index so this turn down, although still looking bad, is not as serious as it might be if the peak value of a week ago was lower than that of the September peak value. We are at an area of support from the January activity and from the intermediate term moving average line but these are not too strong and may not hold.
As with gold, other than the Merv's FAN Principle, the technical position of the XAU is still anywhere from BULLISH to NEUTRAL (at worst) but is getting weaker.
MERV'S PRECIOUS METALS INDICES
Well we could see this coming, finally a reasonable decline in the Merv's Indices with percentages ranging from a low of only 1.4% to a high of 6.2%. Non of the declines are still anything to worry about but of course we must stay on top of them to be sure we are not holding stock should they generate into major bear market status. It should be noted that for ALL of the Merv's Indices (EXCEPT for the two Silver Indices) the short term RATEing has now gone BEARISH with bearish RATEings of over 50% in each Index.
MERV'S GOLD & SILVER 160 INDEX
The average decline in this universe of 160 gold and silver stocks was only 4.7%, lower than the major Indices would suggest. By viewing the Index from a long term perspective the decline was barely a little blip on the chart. Since the start of the bull in this Index (in late 1998) it is now up some 4200%. Not bad for an average Index advance of 160 stocks.
To note the severity of the decline we had more than 4 losers during the week for every gainer (131 losers and only 27 gainers). This had a severe effect on the short term overall BULL/BEAR rating for the group but did not have that much of an effect on the intermediate or long term overall rating. We are still 71% BULLISH in the intermediate term and 87% BULLISH in the long term. So, there is still a long way to go before the overall group turns to the down side.
There were no performances in my speculative range of plus or minus 30%, or over. There was only one in the 20% range. All other performances were below that level suggesting there was no real panic to the selling this past week.
The best performer on the week was Intrepid Minerals with a gain of 20.9%. Intrepid turned POSitive in our technical ratings on 09 Dec 2005 at $0.57 and is now up some 93% since the POS rating.
What this is telling us is that, at the present time, this decline is one to watch for bargains before the next BULL move starts. From my perspective I watch the charts and am more inclined to get back in when evidence shows the new move is on rather than try to pick the bottom.
MERV'S QUAL-GOLD INDEX
The Qual-Gold Index had the worst average performance of the Merv's Indices with a decline of 6.2%, although this was in keeping with the performances of the major gold Indices. With the long term momentum indicator touching the overbought line the decline was to be expected. As with the 160 Index, this week's decline is just a little blip on the long term chart. Since the start of the QUAL bull in 1998 the average price of a quality gold stock has risen by a little over 500% (or 450% from its late 2000 low). Again, not bad for an average increase in "quality" in a little over 7 years. By comparison the PHLX Gold & Silver Sector Index gained about 250% since its bull market started in late 2000.
The decline was wide spread during the week with 28 stocks declining and only 2 advancing. The effect was, however, mostly reflected in the short and intermediate term technical information while it had less of an effect on the long term information. The overall intermediate term RATEing dropped to 57% (from last week's 90%) while the long term RATEing is still up there at 93%.
MERV'S SPEC-GOLD INDEX
The average performance of the top tier of speculative stocks (the 30 largest market capitalization stocks after the Qual-Gold stocks) was a reasonable minus 4.0%. Since its low in 1998 this Index has advanced almost 2900% (or some 2600% since its 2000 low). This really demonstrates the superior performance by just going a notch below the quality of the top quality gold stocks. Is it worth the extra risk one might assume by going for the second tier? You decide.
With 5 gainers and 25 losers on the week, the losers have it but still the numbers are slightly better than for the QUAL-GOLD group. As for the BULLISH RATEings, the intermediate term rating has dropped to 68% while the long term has moved little and is at 88%.
Merv's GAMB-GOLD INDEX
So, how did the gambling stocks hold up under the gold plunge? The average loss was 4.9%, just a hair greater than the universe average but still much better than the QUAL-GOLD drop. This Index is not as old as most of the others and starts only in 2000 so I have no data for its performance since the lows of 1998 but since its low in late 2000 this Index is up over 3400% (or over 5000% on the alternate Index).
The losers outnumbered the gainers as could be expected with 23 losers and only 6 gainers, a ratio better than most other Indices. As for the group BULLISH RATEings, the intermediate term is still rated as 83% while the long term is rated as 97%. Still great bullish ratings but if the gold stocks continue to decline do not be surprised if this group should start to under perform the others at some point in time.
MERV'S QUAL-SILVER INDEX
We now come to the two groups that had the best performance over the past week, and both are the silver groups. The QUAL-SILVER group declined on the average only 3.0%. It should be noted that although the group is composed of the 10 largest "quality" silver stocks half of these stocks show up in the Merv's SPEC-GOLD group. The problem was that there were so few silver stocks that the composition of the two silver Indices took some "quality" liberties. Since the start of the Index bull market in 2000 this group has advanced over 1000% (or 979% since the 2001 low). The performance since reaching a top in 2004 has, however, been one of the weakest of the Merv's Indices.
With 3 advancers and 7 decliners the RATEings moved very little. The intermediate term RATEing is still up there at 80% and the long term is at 95%. As mentioned earlier, the silver Indices are the only Indices where the short term RATEings are still in the BULLISH territory. Here it is at a BULLISH 65%.
MERV'S SPEC-SILVER INDEX
The best performer on the week, the Spec-Silver Index declined only 1.4% on the week. This is the newest Index in the groups with Index values starting in year 2003. Since the start this Index is up some 900%. To understand its performance one only needs to see that it is up almost 150% since its low last May.
With 10 gainers and 14 losers on the week this group has the best win/loss ratio of any of the Merv's Indices. The BULLISH group RATEings are still quite high with an 88% RATEing for the intermediate term and 90% for the long term. The short term RATEing is still BULLISH at 52%.
Well, that's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
12 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.
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