Technically Speaking with Burak
Mervyn Burak, CMT
GOLD
Wow, was that some move in gold or what? Friday's drop shook up the markets but was it really as bad as it looks? The only way we will know is by our weekly review of the market action itself so let's get to it.
LONG TERM
For the long term prognosis I like to go first to the long term point and figure (P&F) chart. Here I see the "big picture" in a nutshell. On the chart we can see the bear from 1996 to 2000 and the bull from 2001 to ??. Since its original long term upside break confirmation at the $300 level in 2001 this P&F chart has been bullish ever since. Friday's action didn't even put a dint in the chart. However, we should not be too complacent. A move to the $410 level would trigger all sorts of nasty things, like a long term P&F bear confirmation. My two requirements for a reversal confirmation are a breaking of the up trend line and a move below two previous lows. $410 would do it. In addition, as we have seen in the bar chart two weeks ago, such a move would also break a bar chart up trend line and a long term moving average line. The price momentum is sure to follow suit. So, from a P&F stand point $410 is a very critical price level. Should that happen what can we expect? Well a move to at least the $370/$380 area for a starter.
As for our usual indicators, gold once more dropped below my long term moving average line and the line is basically horizontal but turning towards the negative. It has also, once more, dropped below that popular 200 day moving average line most analysts follow, although that moving average line is still pointing slightly upwards. The long term price momentum is still inside its positive zone but pointing almost straight down and should move into the negative within another week or so of negative price action. Long term volume still looks okay although I do not place that much credence to the long term volume action as I have found it too often to be a lagging indicator. Putting these views into focus I am still bullish on the long term based more upon the P&F chart than anything else. Based upon the normal indicators only, I might downgrade the rating to a neutral.
INTERMEDIATE TERM
Looking at a somewhat more detailed version of the gold P&F chart to see the intermediate term action (see the chart three weeks ago) the last bull confirmation (intermediate term) was given at $400 in June of 2004. An up trend line was drawn but due to some sideways action that did not result in a trend reversal, the line was moved over towards the right. A bear confirmation was given at $415 causing the down trend (red) line to be drawn. The price did not, however, move lower. It went into a lateral trend again causing the down trend line to be moved over to the right (dashed line). No new bull has resulted and a very serious resistance level has been established at the $445 level. So we are in a lateral trend but still under a bear market confirmation. The green trend line is an alternate up trend line that could be drawn suggesting we are not yet in an intermediate term bear but I like to keep my analysis and prospective of the charts simple. A move to $415 would confirm the bear even using the alternate up trend line while a move to the $410 level would be far more serious.
Looking at a bar chart for my usual indicators I see the Friday plunge has taken gold below its intermediate term moving average line with the line having turned to the horizontal direction on its way to the negative. The intermediate term price momentum has just entered the negative zone and is pointing lower. The volume indicator is horizontal but without Friday's values it is hard to tell if it might not have turned down with that action. For now I will stay with my neutral rating for the intermediate term with one eye open for the possibility of a down turn if the price hits $415.
SHORT TERM
This is where Friday's action is most noticeable. A quick look at the P&F chart (not shown) shows a break below a significant short term support and up trend line for a confirmed short term bear market. A "count" gives us a projection to the $420 level, which is not all that bad if it stops there. Since the end of last year this P&F chart shows the roller coaster ride we have been on, down, then up, then down, then up, and now down again. One of these days it will make up its mind as to where it actually wants to go.
Looking at an updated short term bar chart (versus last weeks) one sees the price well below its short term moving average line with the line already turned down. The recent price moves have decisively broken the short term up trend line and support. Price momentum is pointing aggressively downwards and is inside its negative zone. Volume activity has turned down on the indicator. The daily volume action has been very low once again, after a short flurry of high volume in late May. An ominous indication is the sharp plunge. If you look back at last week's chart you will see that each trend reversal to the down side was precipitated by a plunge such as Friday's. Does this indicate a bear trend in progress? I think so but will continue to watch the action in case of a surprise. With all that one can only come to one conclusion on the short term, bearish.
As for the immediate term information I go to the aggressive Stochastic Oscillator. Here we see an indicator that has entered into its oversold zone and is in a very early stage of turning around (emphasis on very early). It could do what it has done in the past, and that is zig-zag above and below the oversold line before finally getting a rally going. For now it is very mildly suggesting a rest period for the plunge in the not too distant future.
GOLD INDICES
AMEX GOLD MINERS INDEX
Today I will take a look at the relatively new but quickly becoming more popular AMEX Gold Miners Index. This Index includes about 40 mining stocks but the Index value is still calculated using the "weighting" method which results in a few of the largest stocks in the Index having the greatest influence on the Index value. However, despite this one feature this might still be the best of the major Gold Indices available to the general public.
The first thing one notices on this Index is the strength of the trend versus that of gold. Friday's action in gold seems to have had very little effect on this Index, in fact the Index closed on the up side versus the previous day. It is still within an up trending channel and above its short and intermediate term moving average lines. The only hint of a problem is shown in the price momentum indicators, here represented by one of my own indicators. Momentum seems to be getting weaker and weaker with the indicator going through a topping process. These topping (or bottoming) processes can take a few weeks to a few days to complete so we have no sure way of knowing when the top is reached and the turn down has started. One just has to watch on a daily basis and wait for it. Other indicators, especially the short term RSI, are giving a similar message about the toping process. If one were watching this Index as a suggestion as to what the gold stocks are doing I would watch the 630 level as the level at which the trend might be considered to have changed to the negative for the Index, and for gold stocks in general.
One item of note on this chart, an intermediate to long term down trend line drawn from the November top through the March top has not yet been breached by the rally. Despite the intermediate term moving average turning up, this trend line may halt the rally should the rally want to move higher.
MERV'S GOLD INDICES
Although most of the major North American Gold Indices closed on the up side during the past week the Merv's Indices had a mixed performance. The more speculative the Index the worse was the performance. The Merv's Gamb-Gold Index had 7 stocks with double digit declines (versus only 2 on the plus side). The Merv's Spec-Gold Index had only one double digit decline while the Merv's Qual-Gold Index had no double digit declines.
Although starting to look pretty weak, the Merv's Gamb-Gold Index is still the only gold Index that had not broken its long term up trend line. Will the line hold or not? Time will tell.
Campbell Res. Inc. gave us a real surprise during the week, actually on Thursday, just before Canada's birthday. Although it was in a very gentle rally it had not turned bullish before the plunge so that investors, with access to the Merv's table of information and a tutorial, would not have been caught in the 73% decline in one day. This is one of the benefits of the technical side, it follows the money and the money was just not there in this stock trading activity. For more information on accessing to Merv's tables of technical information, see below.
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.
Market Technical Information Group
www.themarkettraders.com
3 July 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.
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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