Burak On Gold & US Dollar
GOLD
Gold ended the week on a high note. Everyone is getting all enthusiastic that the bottom has been reached. Just the time for the markets to do what they have to do to confuse the masses. The action near week-end WAS impressive but not yet enough for a technician to change course. Friday close is sitting just below a down trend line from the Dec top. The price is entering a zone of short term resistance and it would take a move through the $430 level to confirm a reversal in progress. Once through $430 the short term P&F chart would suggest a move to the $450 level, not enough to predict a move into new high ground yet. More consolidation action is required to predict a better move.
Volume has not yet perked up to add to the encouragement. This might improve as the move progresses but for now volume action is a negative. Price momentum is also still in the negative zone for short and intermediate time frame periods although inching towards the positive.
Based upon the charts for gold we need that move through the $430 level to change our previous bearish position. If gold continues moving as it did near week-end the reversal might come during the week. However, let's wait for it and not get too excited.
U.S. Dollar
The latest rally in the U.S. Dollar Index came to an abrupt halt at mid-week as gold made a sudden reversal. I'm not going to guess which is responding to which action. Let's just say the two seem to be moving in concert lately, but in opposite directions.
At week-end the US$ was still above all its moving average lines and above its recent rally up trend line. The halt in its up move may only be temporary. It needs to move below the 83 level before we can start to think in terms of an end to the rally. Nothing in the action suggests that this latest turn will go that far.
Gold Indices
Boy, it sure didn't take much to turn the various gold Indices around, at least on the short term. Looking at the AMEX Gold BUGS Index and S&P/TSX Gold Index we see a very interesting single day reversal action on Tuesday. On Wednesday they took off. The three days to Friday were gung-ho for these Indices BUT it does appear that they may be getting close to a rest period. Friday's action shows a little bit of a hesitation near day end. Whether this is just caution prior to a week end or something more remains to be seen.
On both Indices Thursday's action broke above the third short term FAN down trend line in a Merv's FAN Principle trend action. Optimistically, this could suggest a move back to the previous highs in Dec. A cautious suggestion would be to just assume a rally of unknown magnitude in progress.
The only Index we have volume figures for is the S&P/TSX Gold Index. Here, the volume is encouraging and ahead of the price action. This should not be overlooked as volume is often the lead indicator of subsequent action.
Merv's Gold Indices
To gauge what the gold stocks themselves are doing I always prefer my own Gold Indices. The reason for this is that they are calculated based upon the average performance of all the stocks in the Index. No stock is given any more weight than any other stock. This is not so for most Indices. Most Indices are calculated with each stock given a different weighting towards the calculation of the Index value. Usually, the largest 25% of the companies contribute 75% or more towards the Index value. The bottom 25% usually have a negligible effect on the Index value.
The chart this week is of the Merv's Qual-Gold Index. This Index includes 30 of the largest (quality) gold companies with stock trading on the various North American markets. As stated above, this Index represents the average performance of these 30 stocks.
There are several interesting features in this chart, all suggesting things ahead may not be all that positive for the quality gold stocks. The indicator in the chart is that of a long term Relative Strength Index (RSI). It is a very good price momentum (or price activity strength) indicator. It is somewhat different than the proprietary momentum indicator used in the tables and the message may, at times, differ but not for any length of time.
Despite the fact that over the past 4 years the Index has moved several times above and below its long term moving average line, it has remained above a well defined up trend line throughout this time. The RSI has also stayed above its neutral (50%) level, except for a few minor short lived penetrations. What to note, however, is the continually decreasing strength of the RSI each time the Index has attempted a new move. Ever since early 2002, when the RSI reached above the overbought 70% level, it has peaked lower and lower on each subsequent price peak. This suggests a continuing weakness in the price moves. At some point, the weakness will overpower any little strength left in the Index and a long term reversal will really take hold. Unfortunately, there is no way of knowing when this reversal will take place. One has to just keep watching and act when the price finally confirms a reversal. AND it might be sooner than we expect.
The negative divergence of the RSI versus the Index, in early 2004, may indicate that the final top had already been reached. The past year may just have been the gathering of negative strength for a long term bear to take hold.
From a long term perspective, what we need for the quality stocks to turn back up would be to see new highs in the Index along with the RSI reaching peaks higher than those of late last year.
The three stocks suggested last week had performances of 0% up to 43.7% for an average gain of 16.6%. Not bad for one week. This is an annualized gain rate of 297,7944.0% per year. WOW. Many analysts quote their performances in terms of an annualized rate. It's a statistical game people play. Do you think that last week's gains can continue for a year, at this rate??? Be skeptical anytime you hear anyone talk about an annualized gain rate.
All three stocks from last week still look good.
Reading the Info table
The intermediate and long term technical information table provides the latest weighted moving average (MA), price momentum (MOM), relative strength (RS) and an overall technical rating (RATE) of each component. A + or - symbol is provided to indicate if the indicator is gaining strength or losing strength.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Technical Information Group
merv.burak@hudsonaero.com
5 February 2005
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.
Although not normally available to the public, to obtain a copy of the latest weekly technical information on the component stocks of the various Merv's Gold indices, e-mail a request mentioning this Gold-Eagle offer. PLEASE provide at least your full name and home town.
Email this Article to a Friend 
Printer Friendly Version
