Technically Speaking with Burak
Weekly Commentary
(For week ending 17 February 2006)
Mervyn Burak, CMT
Was my FAN Principle wrong? Are we back in rally mode? I don't think so, at least not yet. However, apparently there are more echoes from the biggies that gold has had it, which almost makes me feel like getting back in the buying game.
GOLD
LONG TERM
Starting, as always, with the long term P&F chart I see that the action so far has barely made a dent in the chart. Oh yes, it does show a down move in progress but that is still far from any long term reversal signal. Such signal, barring further lateral moves, requires a move to the $490 level to provide a reversal, per the P&F. One should always understand that technicians use all sorts of charts and indicators to determine a final judgment. Many of these will contradict one another so just because ONE indicator or chart suggests one thing that does not necessarily end the thinking process. We eventually go with what we have found works best for us in a particular situation. It could be P&F or it could be the FAN Principle or it could be our usual indicators that are reviewed each week. It could also be the judgment as provided in our various tables of technical information and technical ratings. These tables provide very good information and ratings but they are based upon a mathematical model and as with all mathematical models, do not have the brains to perceive occasional nuances in daily trading action. So, as I mentioned earlier, do not be surprised if different indicators give us a different story, even with the same starting trading information. That's what makes speculating, speculating.
The normal indicators are still very positive on the long term basis. Gold price is still far above a positive moving average line and the price momentum, an indication of recent action strength, is still quite positive. Momentum has come down a notch but that is normal after a significant climb. Of greatest interest is the recent new highs in the momentum suggesting that from the long term standpoint the price action leading to the recent highs has not lost any of its strength. The volume indicator, however, has been coming down for the past month and has now just broken below its moving average line for our one normal indicator negative sign. Since volume is an important indicator, and most often lags the market at tops, this negative should be taken seriously.
For now, putting all the indicators together, I am still BULLISH on the long term.
INTERMEDIATE TERM
Looking at the intermediate term P&F chart it did have a bear signal during the week. The action on Monday broke through support and the up trend line for a bear signal, intermediate term. This is a confirmation of the FAN bear signal given a couple of weeks ago. The projection suggests an intermediate term move to the $475 level. Although that was still not at a long term bear signal level last week, the long term chart did go through an extra lateral move during the week thereby raising the location of where a long term bear signal might come. This intermediate term projection, if met, would also trigger a long term bear for the first time since the bull started some 4/5 years ago.
Referring back to the 3 FAN trend lines shown 2 weeks ago, the latest move found support right above FAN trend line number 2, which is often the case, and is now bouncing up from there. This was also a support from the intermediate tem moving average line so an up trend was to be expected. However, now comes the question, are we back to a bull trend or is this only a bounce within a basic intermediate term bear? I think this is only a bounce and my view is still that the move should take us into the space between FAN trend lines 1 and 2. If right, then this might still rescue the long term bull.
As for the usual indicators, I already mentioned that gold was bouncing off the intermediate term moving average line. The line, although still in a positive direction, is starting to flatten out in anticipation of a slope reversal. Price momentum is still positive but moving lower. We did have a negative divergence shown in the intermediate term momentum indicator so the down turn was more expected. The volume indicator is moving lower and is below its negative sloping moving average line.
From all this, the only real positive is the price moving average information. There are just too many negatives so I will go BEARISH on the intermediate term, keeping the FAN and P&F company.
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.
NORTH AMERICAN GOLD INDICES
All of the North American Gold Indices (except for Merv's Gamb-Gold Index) closed the week on the plus side. It's been a month or so since we visited the most popular Index, the PHLX Gold & Silver Sector Index (symbol XAU) [just double checked and find I mentioned this Index last week. Oh well, I'll go with it again]. The XAU barely moved by the end of the week but still made it to the plus side with a gain of 0.2%. As a chart would shows, this Index has not been a great performer over the years but since making its low last May it has doubled in price. It hasn't doubled for many, many years and here it did so in less than a year. On a daily chart we can see the same accelerating bearish FAN trends on the XAU as I had shown for gold. The break came on the same Tuesday, no surprise. XAU is now trying to rally off the FAN trend line number 2, same as gold. Should the Index break below the FAN trend line then the next support would be at the 120 level, where the first FAN trend line is.
After a 100% advance since May one should not be surprised that XAU might take a reasonable rest or reaction. A move to the 120 level would represent a 50% retracement of its previous move. This is a common technical retracement amount. The long term momentum has also warned us of this potential reaction by just touching its overbought line, as it has done on previous occasions.
MERV'S PRECIOUS METALS INDICES
It was a mixed week for the Merv's Indices with anywhere from a 3.4% gain to a 2.7% loss. Very clearly it did seem to depend upon which sector in this volatile and speculative industry you might have had your capital invested in.
MERV'S GOLD & SILVER 160 INDEX
To start I always look to see how the overall universe of 160 stocks did on the week. There is everything here from the highest "quality" to the lowest outright gambles. Since the Index is based upon the AVERAGE performance of each stock in the Index without regard to size this Index gives us a good picture of average overall performance of the industry.
The overall average gain for this group of 160 stocks was only 0.2%, almost a nothing on the week. But of course there were winners and losers. This week it was almost a tie with 80 gainers and 72 losers. Of even greater importance the % BULL/BEAR ratings did not change much during the week. The intermediate term BULL rating dropped from 71% to 65% while the long term BULL rating dropped from 87% to 85%. The short term rating is still primarily bearish with a BEAR rating change from 62% last week to 64% this week. If the short term rating continues bearish can the intermediate term be far behind?
Looking over the stock performances, there was only one stock that performed greater than my plus/minus weekly 30% speculative benchmark. That stock was Jinshan Gold Mines Inc. with a weekly gain of 32.5%. Jinshan first went POS(itive) in Merv's Precious Metals Central technical ratings on 6 Jan 2006. It is now up 46% since going POS 6 weeks ago.
As far as the indicators are concerned, here I only review the intermediate and long term indicators as my Index is calculated only once per week and short term indicators are not too precise when using weekly data. Everything is still in a positive mode with the Index above both its positive sloping moving average lines and price momentum still in the positive zones. We do have negative divergences in both intermediate and long term momentum. Both were inside their respective overbought zones. Both have turned down but are still inside their overbought zone. What we have here is a very bullish Index but with warnings that it is overly bullish and a reversal of trend may be at hand.
MERV'S QUAL-GOLD INDEX
This is for the more conservative investor out there and represents the 30 largest gold and silver stocks traded on the North American markets. This Index had the best performance of the primarily gold based Indices with a gain of 2.0% on the week (the Qual-Silver had a better performance, see below). To go along with this Index gain, there were 24 gainers and only 5 losers among the component stocks in the Index. A very good ratio on the week. As for the overall BULL/BEAR ratings, well they barely moved with long term BULL rating dropping from 93% to 92% and the short term BEAR rating staying constant at 67%. Only the intermediate term had any significant change and here the BULL rating increased from 57% to 68%, almost makes one wonder if there may not have been an error last week.
The intermediate and long term indicators are still quite positive in all respects except for a similar warning (to that of the 160 Index) from momentum that we may be due for a good correction in the trend.
MERV'S SPEC-GOLD INDEX
This group of the 30 largest gold stocks, after the Qual-Gold 30, is our second tier of gold and silver stocks or the top 30 of my speculative stocks. Here the advance on the week was slightly better than the overall universe but nowhere near that of the Qual-Gold group. With a 0.7% Index advance we had 17 gainers and 13 losers in the components. Nothing overly significant in the BULL/BEAR ratings with the intermediate term BULL remaining at 68% and the long term BULL dropping from 88% to only 85%. The more volatile short term rating dropped from a BEAR rating of 82% to 73%, signifying not very much change on the week.
Although still well above its intermediate and long term moving average lines the momentum in both periods has given us a negative divergence and both had been inside their respective overbought zones. Both are moving lower with the long term now below its overbought line to confirm a negative direction of action. Look for more downside ahead.
MERV'S GAMB-GOLD INDEX
When things get cautious or negative the first and hardest hit are normally the gambling type of stocks. They may have risen the highest and fastest on the up side but drop the farthest and fastest on the down side. This Index of highly speculative or gambling type of stocks was the only one of Merv's Indices to have a loss on the week. It lost 2.7%. To go along with this drop we had only 7 stocks advancing and 20 stocks declining on the week. Here too we had the most significant changes in the BULL/BEAR ratings. On the intermediate term the BULL rating dropped from 83% to 60% while on the long term it dropped from 97% to 93%. On the short term the BEAR rating increased from 52% to 63%. The direction of these changes suggests a weakening group.
As for the indicators, once again the Index is well above its moving averages and the momentum indicator is still very positive. However, for both periods the momentum had been inside its overbought zones and have turned down. The long term has dropped below its overbought line but the intermediate term (shown) is still just above the line. In both cases the word is a weakening strength situation. Expect more negative news in weeks to come.
MERV'S QUAL-SILVER INDEX
Where the other Indices (above) are a combination of gold and silver for precious metals Indices, silver has taken out a spot on its own. My two silver Indices reflect the action in stocks that have some silver interests. Since there are few silver stocks to work with the Indices are based on fewer component stocks than are the other Indices. Here we have the 10 largest silver based stocks to form the Qual-Silver Index. This group made the best advance on the week with the Index advancing 3.4% on the week. There were 7 gainers and 3 losers, the same as last week. We still have BULL ratings for all three time periods with the short term BULL dropping from 65% to 60% while the intermediate term gained from 80% to 90% and the long term gained from 95% to 100%.
We can almost repeat what was said for the indicators above. Positive all around but momentum is overdone. Intermediate and long term are both almost into their overbought zones but not quite. They are, however, overly positive, ready for a reversal.
MERV'S SPEC-SILVER INDEX
The last of the Merv's Indices, the Spec-Silver Index barely moved with only a 0.1% gain on the week. When looking at the chart it sure looks like a topping action. Despite the miniscule gain there were more losers on the week than gainers with 14 losses and 7 gainers. The most significant shift in ratings was in the more aggressive short term ratings. Here we had a BULLISH 52% (with a BEARISH 30%) that changed into a BULLUSH 48% and a BEARISH 36%. The bull dropping and the bear rising.
With the recent upside action in this Index it is not surprising that the momentum indicators for both intermediate and long term are way up there inside their overbought zones. They are still inside the zones and with only a hint of starting a reversal to the down side. Despite the poor showing on the week this is still the Index with the strongest momentum of the groups. Of course all good things come to an end and this momentum may be starting to do just that.
SUMMARY
As you can see from the above, we are in for a hell of a ride over the next while. It is my strong view that we are in for a bummer of a market as we have seen about this time for the past few years. Once more I cannot recommend any new buys in the precious metal stocks even though there will always be those few (very few) that move against the crowd. Hopefully, we will end up with another fantastic buying opportunity such as last May but it is only an opportunity if you have saved your capital and have it available to jump in when the turn comes. Although the AVERAGE performance of our Gamb-Gold Index was 180% in the 9 months since May it should be understood that many of the component stocks gained much, much more in the same time period. Southern Star gained over 1200% during the same period while many others gained anywhere from 300% to 600%. I expect to get you back in when the market starts its next move, tomorrow or a few months from now, whenever.
There are times to be in the market and times to just sit back, relax, and watch the carnage. Don't think that you must ALWAYS be in the market. Only losers are ALWAYS invested.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
19 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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