Technically Speaking with Burak
Weekly Commentary
(For week ending 17 March 2006)
Mervyn Burak, CMT
A reasonable week was had by all BUT was it the calm before the storm? Gold rally didn't look all that great while silver looked better but still was losing momentum.
GOLD
Note that there may be references to charts that are not included in this particular commentary. For a view of charts or tables that may be missing please go to www.themarkettraders.com and access Merv's Commentary on the front page.
LONG TERM
I'm just trying to find other long term charts of gold since they do not change that quickly and I do want to show some chart for each time period. This one is interesting as another simple method of defining a long term bull or bear market. It is a daily bar chart with an On-Balance Volume (OBV) indicator. On both the chart and indicator I have drawn a one year moving average line, well not really a one year but close enough at 250 days. The moving average line is a weighted moving average but a simple moving average would give you the same information, only at a slightly later date. On the chart are arrows showing the locations when both moving average lines turn into the same direction. They both turned down at about the same time in very early June of 1996 to signal a long term bear market. The price moving average turned up in 1999 with the spike in price but turned back down almost a year later. The OBV remained negative throughout this period. The price moving average turned up again in early August of 2001 but it was not until late December that the OBV moving average turned up so that both were in sync in late December. This signaled a new bull market which is still in vogue. On very close examination there was a very short period during the month of May, 2004 when both moving averages turned down but this lasted for only a few days and neither activity moved below their recent support levels.
There are at least a couple more points to be raised by a quick look at this chart. The first point is for those that may like the moving average bands above and below the basic moving average line. If we draw a moving average line 10% above and below the basic moving average line we find good points where the price comes to the line and reacts (note that these are not the Bollinger bands as those are drawn using a standard deviation method). During a bear market the lower band offers a good support point from where rallies of sort can develop. During a bull market the upper band offers a resistance from where reactions can develop. In both cases these reactions cause the price to move towards the basic moving average line. Often, as shown, the action breaks through the band but does not stay there for long before a reaction sets in. The period we are in is somewhat unique in that the price has broken above the upper band and has stayed there for some months now. I would expect that in not too distant future (like possibly right now) the price movement might move back below the upper band and head towards the basic moving average line.
The other point is the level of the OBV (which is an accumulation of volume activity indicator). Although the price is at double the height above the bear low versus the previous 1966 high, the OBV has yet to exceed its high of early 1966. What this might suggest is that the 4 year bull market has been rising on what is often refereed to as a wall of worry. Investors are not yet in a state of over exuberance. This is yet to come and should push gold a lot higher than most expect. Great things ahead but first there still may be some not so great things ahead.
So much for a technical seminar. As I often mention, I never know where I end up when I first start a commentary. Back to the present activity. Let's just quickly summarize the long term position of gold as unchanged (BULLISH) from last week and get on to the intermediate term review.
INTERMEDIATE TERM
First a word about the P&F chart. It has rallied a bit during the week but is still below its latest down trend line and nowhere near breaking above a second high for a new bull signal. At this point the P&F is still bearish.
Now a look at the intermediate term Merv's FAN Principle trend lines. On the chart above are the three accelerating FAN trend lines, the first starting in mid-July, the second starting in early November and the third starting in late December. I had called an intermediate term bear right at the top, a day before the breaking of the third FAN trend line (which represented a "blow-off" move). Since the breaking of the Fan there is nothing in the daily action that would suggest the call to be in error. The action to date conforms to action that is not unusual once the FAN trend lines are broken. We had a rally of sorts a few weeks back that paralleled the second FAN trend line (acting as a support). After a break below the second FAN trend line we had another rally of sorts this past week which once more paralleled the second FAN trend line (now acting as a resistance). I would expect the trend to parallel the line for no more than a few more days before a move towards the first FAN trend line. We may even be at that stage now but I'll look at that in more detail in the short and immediate term analysis.
We have already established a lower low/lower high scenario with both the price and momentum. The momentum, although still positive, has been showing significant weakness for some time and is expected to drop below its neutral level shortly. Gold is once more just slightly above its moving average line with the line slope basically horizontal. The volume indicator has moved above its moving average line and the line has turned slightly positive for a positive indication but the daily activity still leaves a lot to be desired.
Putting everything together I must still remain BEARISH on the intermediate term.
SHORT TERM
The short term and immediate term commentaries are normally restricted to subscribers of the Merv's Precious Metals Central service. However, for this week only, I thought I'd leave it in for all readers of the free commentary.
We see here more clearly how the action is paralleling the trend line. Now to see if I can guess what's to happen over the next few days. It's a 50/50 proposition. If I keep guessing I'm expecting to be 50% correct and, of course, those are the guesses that I will refer to when showing my brilliance. Isn't that the way things are done in this guru business?
We have the price just above the short term moving average line (the 15 DMAw) and the line is in the process of turning to the up side. So far, so good. Short term momentum was negative and is now moving along the neutral line for a basic neutral reading. The daily volume action continues to show lack of enthusiasm from speculators, except on down days, for a worrying indicator. Finally, looking at the daily action this past week does not show signs of strength despite the fact that most of the days were up days.
I would classify the short term as NEUTRAL at this point. I would go to bullish on a move above the trend line and to bearish on a close below $548 on the April COMEX futures contract.
IMMEDIATE TERM
So, what do I expect over the next day or so? The aggressive Stochastic Oscillator (SO) is just inside its positive zone and above its trigger line BUT on closer look, is starting to close the gap between itself and the trigger. This is yet not an indication of a change in direction but this closing of the gap happens first before any change of trend. The price is above its moving average line (the 8 DMAw) and the line has turned up. Up to here we have nothing but positives for the immediate term. However, taking a close look at the recent price action we see that since Wednesday the price has been having difficulty going anywhere. One can almost visualize a very short term topping activity. But that just might be trying to read something into the action that may not be there. Going with the old standby "a trend in motion remains in motion until a reversal is verified" I will go with continued upside action over the next few days BUT will change fast should the price close below Friday's low of $552.50.
NORTH AMERICAN GOLD INDICES
I thought I'd show the PHLX Gold/Silver Sector Index (XAU) today. It is a good chart that demonstrates the idea that so often the gold stocks, represented by the Indices, are often leading indicators of where gold is going. Here we see the accelerating FAN trend lines with the third and second trend lines already broken. Also shown how the lines tend to be either support or resistance lines depending upon the direction of the action. We see where the XAU headed straight for the first FAN trend line and then bounced up from there. Yes, I see the 200 DMAw line also but it doesn't fit with my presentation so I'll make like it wasn't there. Should the Index break below the first FAN line then it would be heading towards the 100 level, which would be the next support. That would make for a 36% decline which is not unusual for an intermediate term bear decline. Gold would not be expected to decline as much % wise but still is expected to move lower into May. Also noted on the chart is the negative direction of the intermediate term moving average line.
Now, compare this chart (which is not that much different from the other major Indices) versus the Merv's Indices.
MERV'S PRECIOUS METALS INDICES
It was a good week for all Indices and Merv's Precious Metals Indices were no different. Their performances were, however, widely diverse with the Spec-Gold gaining 1.6% while the Spec-Silver gained 5.6%. As a group they still are the Indices to beat.
MERV'S GOLD & SILVER 160 INDEX
The overall universe of 160 stocks gained an average of 2.7% on the week. Not up to the gains of the major Indices but it looks like the speculative stocks took a bigger hit than the quality stocks. Although the chart still looks like a topping action the Index itself is still well above both its intermediate and long term moving average lines and the moving averages are still in a climbing mode. Where the major Indices are below their February lows the 160 is still a safe distance above its February low. Momentum has been showing signs of weakness with its negative divergence versus Index action. This tells us to beware of trouble ahead.
We had 103 gainers on the week with 48 losers. This better than 2 to 1 ratio on the up side did very little to the overall percentage ratings on the week. The intermediate term bullish rating went from 51% to 53% while the long term rating didn't budge at a bullish 83%. On the short term we went from a bearish 58% to a neutral 42% bull and 44% bear rating.
There was only one stock that met my over/under 30% performance criteria on the week. Quaterra Res. Inc. gained 36.0% on the week. Quaterra went POS in our technical ratings on 18 Nov 2005 at $0.43. It is now up 137% since going POS (see chart below).
MERV'S QUAL-GOLD INDEX
The Qual-Gold Index gained 3.9% on the week, about at par with the best of the majors. The potential topping action and momentum weakness is most evident here as opposed to other of Merv's Indices. The Index closed just above its intermediate term moving average line with the line in a definite turning phase but not yet fully turned to negative. Momentum, although still in the positive zone, is moving lower and has crossed its momentum up trend line from the May low. A negative divergence is also shown. With some intermediate term negative indicators the Gold table has rated this Index as +N (up from NEG last week).
The week has seen a significant number of gainers, as compared losers (26 to 4). The overall ratings mostly improved with the intermediate term rating going from 63% bearish to only 50% bearish. The long term has, however, lost a little by going from 70% bullish to 68% bullish. On the short term we moved from a very bearish 80% to a neutral 35% bullish and 48% bearish. Of all the Merv's Indices the Qual-Gold Index is the weakest and it is here that we can expect a trend reversal first.
MERV'S SPEC-GOLD INDEX
The Spec-Gold Index had the weakest performance of the Indices with only a 1.6% gain on the week. The Index chart looks good but performance wise it is not the greatest of the Indices. We still have the Index above its positively sloping moving average line with a momentum that is still comfortably in the positive zone. However, momentum has already given us a warning that the recent moves have not had the strength of earlier moves. We have a negative divergence which often leads to a price reversal.
The weekly winners versus losers was not quite a 2 to 1 ratio (19 winners and 10 losers) but it was enough to improve the overall ratings somewhat. The intermediate term rating went from a neutral rating to a bullish 52% while the long term went from a bullish 77% to 80%. On the short term the improvement was still not enough to get us back to the positive with the rating improving from a bearish 65% to a still bearish 53%.
MERV'S GAMB-GOLD INDEX
While all of the major Indices are some distance below their recent highs and all the other Merv's Indices are still below their recent highs Merv's Gamb-Gold Index has moved into new all time high territory during the week. Although the weekly gain, at 3.8%, was not the best in the bunch it was enough to propel the Index into new highs. The Index has now moved significantly above both of its moving average lines with the long term moving average line at such a distance that I would not expect a long term reversal of trend for many weeks of negative markets. As with the other Indices, momentum is giving us a cautionary signal although not at the same negative level as the others. It is some distance above its up trend line from the May low but has started to show a potential negative divergence versus price action.
Once you get away from the indicators and into the market "breath" information you start to get a little worried. The ratio of winners to losers was about the weakest of the Indices with barely a 1 to 1 ratio (15 winners and 13 losers). On the performance rating information both the intermediate and long term ratings stayed constant versus last week. Only the short term rating improved very slightly from a neutral to a 50% bullish. If it were not for 6 stocks with double digit gains this Index might have closed lower on the week.
Although the action is still concentrated in the bottom rung of the speculative category stocks there are enough negative signals being broadcast from the various indicators to make one somewhat uncomfortable. Until better indications are provided this is a time to sit back and enjoy the frustrations of others. Any stocks owned in this category should be watched carefully and sold quickly when their trends change.
REMEMBER, THE REAL LOSERS IN THIS GAME ARE THOSE WITH NO CONCEPT OF PROTECTING THEIR CAPITAL.
THE SILVER INDICES
In general the stocks that have a silver play are still the ones with the better performance. Silver seems to be acting better than gold and there are many analysts on the internet that will explain why.
As a technician I am not interested in the "why", just that it "is". Technicians go with the "is" and let the fundamentalists worry about the "why". Unfortunately for too many "investors", when a market turns on them they learn the "why" long after the "is" had turned and moved the other way. When faced with "why" and "is" messages that are different I would always place my bets on the "is". The "is" is the result of hundreds or thousands of investors who may have different sources for their "why" that on a combined basis is probably more accurate than a single source "why", and they are acting with their money.
MERV'S QUAL-SILVER INDEX
With a 3.5% gain on the week the performance was not all that better than the average performances for the precious metal groups. As with most of Merv's Indices this Index is still well above its intermediate and long term moving average lines with the lines still pointing aggressively upwards. Of interest is the momentum indicator. It is the only momentum indicator of the Merv's Indices that has not shown a negative divergence versus price action. This does not mean that the price cannot move lower very soon just that the recent upward move of the Index has not been losing any strength.
A slight weakening in the weekly performances is noted. The number of winners has dropped from 10 to 8 while the number of losers has increased from zero to 2. On the ratings we still have that 100% bullish rating for both intermediate and long term. On the short term we are still neutral although the bearish portion has dropped very slightly.
MERV'S SPEC-SILVER INDEX
This should be labeled a Spec/Gamb Index as some of the component stocks in this Index are also included as gambling stocks in the Gamb-Gold Index. With a gain on the week of 5.6% this Index had the best performance of any of the Indices in the Gold Tables (except for the FTSE Africa Index). That still did not get the Index into new high territory, that distinction still rests with the Gamb-Gold Index. No need to say that the Index is well above its moving average lines. Momentum is very positive and is still inside its overbought zone. Despite this it has moved below its up trend line from the May low for a negative momentum implication. Things may get weaker ahead.
With 16 gainers and 6 losers on the week one might have expected a little better ratio but one will not quibble. There was a mixed message from the overall performance ratings with the intermediate term rating moving from a bullish 76% to 80% while the long term rating dropped from a bullish 96% to 92%. On the short term the previous neutral rating has improved to a bullish 54%.
When mentioning these ratings it is understood that we cannot have both the bullish and bearish ratings above the 50% level at the same time. The two together cannot be more than 100% so if we have a bullish 65% rating then the bearish rating cannot be more than 35%, usually lower due to many individual stocks being rated as neutral. When neither rating is over 50% then we have a neutral condition until one or the other gets to 50% or over. As mentioned, this happens when some individual stock ratings are neutral thereby lowering the overall rating summation to less than 100%.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
19 March 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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