LONG TERM
The long term P&F chart is still bearish whether we use the previous $10 unit or the new $15 unit chart. The $15 unit chart (shown) has a down side projection to the $490 level and the action this past week has done nothing to change that. The bounce has been very labored for the 1.1% rise we got out of gold during the week. Although I am a great fan of P&F, especially my own version of P&F, I do understand its strengths and weaknesses and before tearing my hair and going bearish I look at the other indicators to see if there is any confirmation from them. In the end, going bearish or staying bullish is a judgment decision.
Looking at a normal long term chart of gold, and using a daily data version, one can see that things are not quite as dark as the P&F chart might indicate. The price is criss-crossing my weighted 200 DMAw line while the line slope is still somewhat positive. The more popular simple 200 DMA line is still resting directly below the recent action. Both MA versions are classified as positive. On the momentum side, the long term RSI indicator, which I prefer using as the momentum indicator, is still above its neutral line for a positive reading. Although above its neutral line one must be careful as the direction of the indicator is downward and any further negative price action could push this indicator into the negative zone. As for volume, well that's also a positive story at this time but it is not all that important. Volume action, especially for the long term prognosis, is important if it is providing a message leading the action. In this case if the volume indicator was very negative, THAT would be important. However, the volume indicator is still giving a positive reading and I would probably not give it much weight towards a judgment decision.
All in all I will continue with my NEUTRAL rating for another week.
INTERMEDIATE TERM
I showed the P&F chart last week. The bar or candlestick charts don't look any better. We are in an intermediate term bear market which could end any day now, or could still go on for some time (I think I've got myself covered now no matter what happens). We are in somewhat of a rally mode for the past week and a half but it has done nothing towards alleviating the bearish intermediate term indicators. The price is still below a negatively sloping moving average line, which seems to be getting more aggressive on the negative side. Momentum is still inside its negative zone although it is trying to recover and move above the neutral line. The volume indicator is still showing a negative bias with the latest indicator line below its moving average trigger line.
Now for some brighter news. The downside action had been halted at a support level from action in the Jan through March period. The rally (or bounce) is also from the very long term up trend line that was (or still is) the upper channel line shown on the long term chart last week. This suggests that we have a strong resistance to further downside action at around the $550 level, give or take a couple of % points. If I were to try and guess what the next few weeks has in store for us I would guess that the price will hold above the $550 level (again, plus or minus a few % points) but will not really go too far in the upside direction. Lateral drift may be the action for the next few weeks (now watch the price take off in one or the other direction to embarrass me).
For now I must remain BEARISH on the intermediate term although I am looking at a possible lateral action.
SHORT TERM
When commenting on the short term or immediate term the focus is somewhat different than when commenting from the intermediate or long term. When commenting on the intermediate or long term my focus is on "where are we right now based upon a review of intermediate or long term indicators?" When commenting upon the short or immediate term my focus is on trying to guess where the market is headed during the specific time period, based upon a review of what has happened to that date. One is statement of present fact while the other is a predictor of the very short future. I would not dare to predict where the price of gold is expected to be 3 or 6 months from now but I can hazard a guess as to where the existing trend is likely to take us over the next couple of days or weeks. I have been asked often for my assessment as to where gold will be in 6 months or when gold will reach any given price in 6 months to a year. I leave such answers to those who have better crystal balls than I have.
Looking at the chart and trying to guess as to where is the most likely place that gold will go over the next week or so one finds that it has been easy until right now. Right now we are at a crucial point on the charts. Another day or two of decent rally and we could be in for much, much more but a day or two of reasonable downside and who knows where it will stop. Although the short term indicators and trend are firming up the direction has not yet been confirmed for a turn around. The daily action is still within a down trending channel although one must fool around with the trend lines to get an appropriate channel. The upper channel trend line drawn last week had been breached but not decisively so an updated line was drawn to account for last week's action. The short term moving average line, although starting to flatten out, is still pointing in a downward direction while the Friday close was just a hair above the line. We see a short term up trending channel covering the action of the past week and a half. This channel is about to come into conflict with the down trending one and one or the other has to give way. Momentum has perked up but is still in its negative zone. The direction of momentum is towards strengthening and here again, a continuation is required to change the price trend.
A trend in motion remains -----. By this criteria I must assume that the short term direction will once more turn to the down side breaking the lower channel trend line of the up trending channel and continuing towards lower levels. However, should gold close above $600 this would break the upper trend line of the down trending channel and close above the short term moving average line. This should also turn the moving average line towards the up side thereby confirming a reversal to a short term bullish trend. There, I think I have myself covered for almost any eventuality (except, of course, should the trend go into a wavy up and down lateral drift trend as it had earlier in the year).
IMMEDIATE TERM
The above commentary reflects the trend based upon "what if up or what if down" guessing. Now we see if we can come up with the most likely scenario for the immediate direction of the price thereby guessing which of the "what ifs" is most likely.
The very short term trend has turned to the up side with the price action above a positively sloping very short term moving average line. The Stochastic Oscillator had turned up and moved above its oversold line but has not yet moved into the positive zone. It is heading in that direction. Daily volume activity has been interesting. It has been very low since the start of June, during the plunge and during the latest rally.
There is often a misconception about volume activity. You hear so often that high volume means the move is strong and low volume means the move is weak. High volume is almost always an indication of strength or weakness, depending upon the direction of the price but low volume is not as often an indication of weakness. The natural tendency of investors and speculators is to buy (and hold). They are reluctant to sell. So, the majority of activity should be seen on the buy side and not as high on the down side. This is why high volume on the sell side is VERY, VERY important as it goes against the grain.
The low volume during the recent decline therefore has little meaning but the low volume on the up side during this latest rally DOES have meaning and that is that speculators are not yet ready to jump on the bullish band wagon. What one would like to see is volume perking up as it did in late March (see chart) right at the start of the previous up trend. This we do not have.
All that is nice space filler type of stuff BUT where, oh where, is the market going early in the week? My guess is that we are about to see a reversal of daily activity back to the down side. Any more upside activity must be watched to see if the volume action perks up otherwise such upside is just getting closer to a reversal. A close below $575 would confirm the continuation of the down trend while a close above $600 would confirm the continuation of the up trending channel.
In taking turns with presenting the four major North American Gold Indices it's the turn of the S&P/TSX Gold Index this week. It is also an instructive Index to present as it is about the only Index that provides daily volume information, or at least the only one providing easily obtainable volume information. One will notice the recent volume action and the looks of the volume indicator. During the rally of the past several days the daily volume was quite low, confirming the message that gold itself gave us. Going over to the On-Balance Volume indicator we see where the indicator has been relatively flat throughout this rally. If we had a good rally with good volume action one would expect to see this indicator at least at the level of the beginning of June. This just further supports the proposition that we are having a short term rally within a primary intermediate term bear market.
Well we're back to a positive week. Now let's hope this is not a one or two week wonder as it was a few weeks back. The force is still towards the dark side but getting weaker and maybe in another week or two things might improve to the point of once more looking at good buys. Looking at the Index ratings in the Gold & Silver Indices Table we are still not at the point of getting too gung-ho. There are no POS RATE(ings) for the long term, all NEG for the intermediate term and only one POS on the short term. That short term POS rating is for the Qual-Silver Index. The Merv's Qual-Silver Index has only 10 component stocks, the lowest number of component stocks of any of my Indices. I usually try to have at least 25 to 30 stocks in an Index but there are times, such as the Qual-Silver, that there just are not that many stocks that qualify to be included in the Index so one has to make do with what is available. With only 10 stocks in the Index, 2 or 3 good movers can have a considerable effect on the overall Index calculation.
MERV'S GOLD & SILVER 160 INDEX
It's always instructive to see the performance of the overall universe versus the various sectors. This week we see the sharp contrast between the quality and the gambling stocks. The overall universe advanced by 2.9% on the week. Now, this Index is a mixture of every quality of stock but majority speculative. The gambling variety gained only 2.2% on the week while the highest quality gained 5.1%. From this we see that the action, although generally positive throughout the various sectors, had its major benefit in the quality stocks. When investors are still very cautious they look to the quality. As investors, or speculators, become more confident in the market they move towards the speculative and then to the gambling variety. We are not yet at the speculative stage. Investing in the quality during a bear or negative market environment too often leaves investors with a bad feeling.
With the long term rating for this Index set at a +N and the intermediate term still at a NEG, this is still not the time to be getting back into the market. Better to be a little late and reduce the risk than to be early, and early a lot lower, and early still lower, as the market continues in its bear trend. The Index is bouncing off its positive long term moving average line but still below its negative intermediate term moving average line. Momentum wise we have the intermediate term momentum just inching its way above the neutral line while the long term momentum remains in its positive zone.
Overall, we had 67% of the stocks closing on the up side this past week while 33% closed on the down side. What this has done to the overall component stock ratings is to reduce the bearish percentages from last week. These ratings are still on the bear side but not as bad as last week. The long term bear has moved from 61% to 54% of the component stocks while for the intermediate term bear it moved from 93% to 86% of the component stocks. Short term, the most volatile rating term, the stock bear ratings moved from 86% to 51%.
MERV'S QUAL-GOLD INDEX
Where the action was. The Qual-Gold Index was the best performer of the gold sector groups with a gain of 5.1% on the week. I guess this was to be expected as it has been one of the weakest on the down side. It is, however, still below its negatively sloping intermediate term moving average line and below its long term moving average line although this line has turned to the up slope. Momentum is just as mixed with the intermediate term being negative and the long term being positive. Noted on the Index chart is an accelerating bearish FAN trend lines with the breaking of the third FAN occurring right at the top of the trend. The latest rally has taken place while the Index dropped to just about the FAN trend line number one.
From a component stock performance, 83% of the stocks closed higher on the week while only 17% closed lower. As with most other groups, the ratings of these stocks showed a slight decrease in their last week's negative ratings. On the long term the bearish rating dropped from 87% to 67%. On the intermediate term the rating barely moved but did drop from a bear 100% to 97% while on the more volatile short term the bear rating dropped from a bear 97% all the way to 47% for a neutral rating.
MERV'S SPEC-GOLD INDEX
A POWER FAILURE (which is not unusual where I live) has put my schedule far behind so I shall leave the rest of this commentary for next week.
Just a quick note that Galt Publishing will be introducing a new service for investors interested in the Energy stocks. I will be providing my tables of technical information and ratings for all the component stocks of the S&P/TSX Capped Energy Index, the NYSE Energy Index and my own Merv's Canadian Spec-Energy Index of 60 secondary oil & gas stocks, with more planned at an early date. Commentaries and individual stock analysis will be provided by Meridian.
Give it a look at www.themarkettraders.com
That's it for this week. Apologies for the shortened commentary.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
26 June 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.