Technically Precious With Merv
Weekly CommentaryIt was a quiet week but Friday sure got rid of that fast. One day and that may be it. Are we back to the bull or is the bear still in the game? Let's see.
(For week ending 30 June 2006)
Mervyn Burak, CMT
Due to limitations on some web site there may be charts or tables referred to but missing in the commentary. An unedited commentary may be found at www.themarkettraders.com.
First, looking at the long term P&F chart (not shown) gives us no comfort. The chart is still bearish and with no immediate reversal (in the chart) expected anytime soon. We're looking at the $650 to $675 range before the P&F chart has a chance of reversing. The P&F chart has now reversed its multi-year stand. It was the chart that kept us bullish throughout the rise since 2000 but now is the chart that has turned bearish first and continues. Good thing there are other charts and indicators to develop an overall long term picture.
As for the more common chart and indicators, well the price of gold is above its continuing positive moving average lines (note the two, 40 WMAw and 40 WMA simple) and momentum continues to move inside its positive zone. As this week's chart shows, the momentum broke below a long term up trend line in late May and it has been a bummer ever since, despite being in the positive zone. The slight perk up these past two weeks is not all that strong and does not (yet) suggest longevity in the latest price strength. The long term volume indicator is still very much on the up side but as I have mentioned before, volume on the long term basis is important if it starts to lead the market on the down side. THAT would be significant.
To put the long term indicators together I might be inclined to go back to the bullish position if not for the P&F chart. I will therefore stick with my NEUTRAL long term position but more bending towards the bullish.
The intermediate term P&F chart gives us some interesting information. I usually do not look at the intermediate term chart from a date much earlier than the last upside break-out. However, modifying the chart slightly to take into account the much higher price level versus when we first started I get a chart that has a long term up trend line from the 2000/2001 bottom, touching the activity during the 2004/2005 period and now just touching the low reached a couple of weeks ago. Unlike the long term P&F charts, this gold price has not yet broken its up trend line, close but no break. It has been setting itself up for a move to the up side and has now broken above previous highs but not a preliminary down trend line. BUT is the down trend line really valid if we are still above the up trend line from the start of the bull? I'll probably have an intelligent answer to that question once I see which way the activity proceeds. Nothing like hindsight to get the right answer. The consolidation of the past couple of weeks gives one a P&F projection for a move back to about the $670 level, not yet new highs and still within the channel that this new intermediate term P&F chart shows. I'll try and remember to show this chart next week.
As the chart this week shows, despite the surge on Friday gold is still below its intermediate term moving average line and the line is still pointing downward. On the other hand, momentum has just crossed back into the positive zone but not yet with any vigor. As for volume action, the volume indicator, from the intermediate term standpoint, is below its moving average trigger line and acting quite weak. Of course I do not have the volume for Friday's action to see how that action affected the indicator. I just can't understand in this day and age, with computer technology now over 50 years old, why the futures industry cannot give us the daily volume information on futures trading at the end of the day like the exchanges do for stocks, instead of providing it a day late. I have never heard of a logical explanation that did not revolve around the idea of "s---- the public".
I have been bearish on the intermediate term and although momentum is perking up and providing that possible advance warning that things might be getting better ahead I will remain BEARISH for now. Just too many indicators that have not confirmed a turn around.
This is where we get a clearer view of the on-going action in gold. The previous down trending channel has been decisively broken and we now have an up trending one. A move above the $600 mark has now reversed the short term move to the up side. The action is well above a positive short term moving average line with momentum now entered inside its positive zone. The volume indicator (not shown) is still neutral but once we include any volume from the Friday action I'm sure it will go positive. However, the daily volume action leaves a lot to be desired. Throughout this rally the volume has been pathetic and not something that one gets enthused about. This lack of volume may be the deciding factor on the longevity of this rally. Without increasing volume backing the move you ain't gonna go nowhere. Another cautionary note is the fact that Friday took the action almost to the upper channel trend line suggesting that there is very little upside left before going through a short rest period and meandering back to the lower line. However, this early in any move, the channel or trend lines are still preliminary and can be easily broken to produce a new trend line. The other feature to note is that the very short term moving average line has now crossed above the short term one. This very often reflects a trend in motion that is not going to end in a day or two but possibly last for a few weeks, at least. All in all, if I was a betting man I would place my bet on a continuation of the up trend in motion but realizing that there may be rest periods, or very short reversals, along the way. A close below the $575 level would, however, put us back into the down trend.
Most everything was said in the short term section so let's see what's left for the immediate term. Ah! The Stochastic Oscillator. Since crossing its trigger line over two weeks ago the SO has been moving higher ever since. Crossing above its oversold line some two weeks ago confirmed the immediate trend in progress and now it has crossed into its positive zone for reconfirmation of the trend. Although everything is just gung-ho positive I would be inclined to guess that the next couple of days are going to be difficult, not necessarily sharply negative but not anything like Friday. My guess would be for a lateral or possibly slightly negative action in the next couple of days. Just a guess. The trend itself is still to the up side so the guess is going against the trend.
NORTH AMERICAN GOLD INDICES
Although it was the turn of the AMEX Gold Miners Index to be shown today I thought I'd show the PHLX Gold/Silver Sector Index instead, for a reason. This is probably the most popular gold Index of any of the major Indices. Anyone who doesn't know anything (a huge population) is watching this Index as a measure of the gold stock market. Whether one thinks the Index is any good or one of the best, so many analysts and commentators watch this Index that makes it important.
The feature I want to highlight here is the POTENTIAL of a developing head and shoulder pattern. So far the market action is going along in concert with what one might expect for a developing H&S. We have the head at the 170 level and we have both left and right shoulders at almost the same 120 level. The right shoulder is just slightly below the 120 level which would make the neckline sloping downward, slightly, but at this stage that is not important. What makes this developing pattern look more and more like an eventual H&S is the action of the momentum indicator. It has shown a reduction in strength at the head versus during the left shoulder. It has shown a significant weakness in the strength at the right shoulder versus the left shoulder. For this to be a valid H&S the action should not go into a new high and preferably no higher than the peak of the left shoulder, although such equating is not necessary. The momentum must continue to show developing weakness. The action must then break below the neckline. We would probably see momentum break into its negative zone ahead of the neckline break. Should all this occur, and I'm not saying it will but is a potential, the H&S would project the move all the way down to the 70 level for a bear move of almost 60% versus the 170 high.
This is still a very risky time to be holding gold and silver stocks, until better confirmation that a bull trend is back in business.
MERV'S PRECIOUS METALS INDICES
I guess Friday made it a good week for all the gold Indices, including the Merv's Indices. One notices that the major Indices did slightly better than the Merv's Indices. On closer look we see that the Qual-Gold and Qual-Silver Indices were about equal to the performances of the majors. It was in the secondary or speculative section where we see an under performance. When investors buy into the quality rather than the speculative that means they are not yet convinced of a general turn around in gold stocks and are concentrating on the presumed safety of the higher quality stocks. Not a very glowing appraisal of the market potential ahead. On the other hand, when a new trend starts investors always seem to go for the quality first before getting into the speculative, so let's just wait and see how this develops.
Before going into the individual Indices I just thought I'd look over the various Indices and see if there is a similar potential development of a H&S pattern in any of these Indices. Only the Qual-Gold Index has a potential H&S in the development stage. It could be that only the quality gold stocks are in for a shocker but not the mass of secondary or speculative stocks. But of course, a reversal does not always have to take place from a H&S pattern.
MERV'S GOLD & SILVER 160 INDEX
In my view this is the best overall view of the gold universe of stocks on the internet, or anywhere else. A total of 160 gold and silver stocks all competing against one another for investor's attention. These 160 stocks are not weighted in any way towards the calculation of the Index value. Each has the exact same weight towards the Index value based only upon each stock weekly price performance.
When speculating in gold stocks you ARE NOT buying the company. Your ONLY interest should be to get maximum performance from investment capital depending upon the level of assumed risk one is willing to accept. You should not care if a stock has a 10 Million oz. gold mine behind it or if it doesn't yet even have a mine. NEVER, NEVER, NEVER average a loss by buying on the way down. ALWAYS have a stop loss, preferably a mental one, and ALWAYS act on it. A stop loss tells you the point at which you have confirmed an error of judgment has been made or where a trend has reversed. Why keep holding a losing stock, go on to something new. You should NOT be in the market all the time. There are times to just sit back and relax, watching the masses tear their hair out wondering what to do next. When the time is ripe and the odds are in your favor, jump in with both feet and go for it, always remembering that there is no such thing as a risk free speculation. I would usually advise 5 to 10 stocks in a portfolio, depending upon the value of the portfolio. Any fewer and you are just rolling the dice and praying for that 7 to show up. Any more and you just have a mutual fund and not a portfolio, with a mutual fund type of performance. In such case just buy the fund and relax. So much for this week's rant.
Let's see how the universe is doing. From the long term standpoint the overall rating in the table has stayed constant at a +N rating. From the intermediate term standpoint the rating has also stayed constant, as a NEG rating. It is in the short term that we see quite a change in rating, from a NEG to a POS rating for all Indices. The picture changes a little when looking at the weekly chart and using slightly different indicators. Long term the chart shows an Index above its positive moving average line with a momentum that is still positive. This would justify a rating of POS for the long term. Intermediate term we have an Index that is still below a negative sloping moving average line with a momentum that was NEG but has now just entered the positive zone. This would give us a NEG rating or a -N at the best. As for the overall ratings for the individual stocks, well they improved somewhat but only the short term has moved into the POS rating level, the other time periods are rated as NEUTRAL.
MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV'S GAMB-GOLD INDEX
Instead of repeating over and over again almost the same analysis for each of these three sector Indices I though I would just lump them into one general commentary with the differences between them noted. Subscribers have the individual pages of technical information to view independently while the overall Merv's Gold & Silver Table of Global Indices is available in the subscriber's section or reproduced at the end of this weekly commentary. It is noted that the Indices ratings in the table may differ somewhat from those expressed here due to the use of different indicators versus those used in the mathematical model of the table.
In general the ratings of all of the three sectors, for all time periods, improved somewhat during the week. On the long term all three sectors have Index values that are above their positive sloping moving average lines. All of the sectors have long term momentum indicators that are still in their positive zones and after this past week's action, again pointing upward. From this one can assume a long term rating for all three sectors as being BULLISH.
Things are just about as uniform for the intermediate term with the momentum indicators all once more inside their positive zones after a very short stay in the negative. Although the Qual-Gold intermediate term moving average line is just about horizontal and the Index is almost right on top of it for a basic neutral situation, the other two sectors are the same with gold price below their negative moving average lines. The Qual-Gold Index may be classified as NEUTRAL while the other two as - NEUTRAL (at best).
As for the overall ratings for the component stocks of each sector, these ratings have all improved but only on the short term have they moved over into the BULLISH camp. The Spec-Gold and Gamb-Gold are still rated as BEARISH on the intermediate term while Qual-Gold and all three for the long term are rated as NEUTRAL.
Silver continues to act poorly even after this past week. The action since the top in Mid-May has been very similar to that of gold except for two interesting differences. First, the recent volume action in silver has been much more positive than that of gold but the intermediate term momentum is a lot weaker than gold. What the final outcome of this is yet to be determined but in the end both gold and silver will move together, but not necessarily in the same proportion.
The long term P&F chart has silver still in the grips of a bear market. The breaking of that huge topping pattern still gives us a downside projection of $4.00, which at this stage seems quite unlikely. However, the topping pattern could be viewed as a Head & Shoulder top pattern and the breaking of the neckline projecting the move to the $8.50 level. This seems the more reasonable projection for now.
MERV'S QUAL-SILVER INDEX
MERV'S SPEC-SILVER INDEX
I will lump the commentary for these two Indices similar to what was done for the gold Indices. Again, subscribers have the individual Indices tables to view.
As with gold Indices both of the silver Indices perked up during the week but apart from the short term period, the perk-up really hasn't changed much. Long term both Indices have the price above their positive moving average lines and both have momentum indicators that are in the positive zone and moving higher. So both Indices may be rated as POS or BULLISH on the long term. For the intermediate term both differ. The Qual-Gold Index is just slightly above a negative moving average line while the Spec-Silver Index is below a negative sloping moving average line. While both momentum indicators are moving higher that for the Qual is just on its neutral line while that of the Spec is well above its neutral line. From this I would rate the Qual-Silver as NEUTRAL while the Spec-Silver as - NEUTRAL.
As far as the overall ratings for the individual stocks are concerned, both sectors are rated as short tern BULLISH, on the intermediate term the Spec-Silver is rated as BEARISH while the Qual-Silver is rated as NEUTRAL, as are both for the long term.
MERV'S GOLD & SILVER INDICES TABLE
Note that Merv's Non-edibles Futures Table may be found in the Global Indices section of the www.themarkettraders.com front page.
Gold & Stocks Differ
As one can see from comparing the performances of the stock Indices versus that of gold or silver bullion, they differ. On the long term both the stocks and bullion would be seen to have moved together but on a continuing basis, they both may not necessarily be moving in concert. One should not always assume that if gold moves so will the stocks, or visa versa. Gold may move for a time and then reverse back to where it was without any movement from the stocks, or worse, a reverse movement. Follow the charts and trends.
To all my U.S. readers, here is wishing all a very happy and safe Independence Day holiday. Drive Safely.
That's it for another week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
3 July 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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