Technically Speaking with Burak
Mervyn Burak, CMT
GOLD
The US$ moves up a little, gold moves down a little, is the game of opposite movements in progress again? I keep reading about gold as "real" money and one should own it for financial protection. If you are reading this you are in it for the profits, protection will then take care of itself. More on this later but first let's get into what's going on.
LONG TERM
Taking a look at the long term point and figure (P&F) chart shows a very precarious situation. Two weeks ago I showed this chart and highlighted the support that must hold or else we will get a confirmed P&F bear market signal for the first time since the start of this bull market. A move to $410 would do it. Well, we are awfully close to that point. A move to $410 would also give us a projection to the $330 level. On its way there a further projection to $250 might be possible. With all of these dire consequences one would hope that gold would have the good manners to just reverse and move higher, a lot higher.
Looking at the long term bar chart, the negative divergence between the actions of the long term Relative Strength Index (RSI) shown last week and the Merv's Long Term Momentum Indicator (not shown) versus the action of the price of gold is significant. It is not uncommon to get divergences where the indicator does not quite reach a new high when the price is making new highs. All that signifies is that the latest action is almost equal in strength to previous action. However, when there is a significant divergence this tells us that the strength of that latest price move has been seriously weakened. After a long bull move such serious weakening is most often (but not always) a prelude to a trend reversal. Often, as in this case, there is still some amount of lateral movement before the turn. Despite all the talk and opinions that gold is destined to go through the roof (and I have been one of those gold bugs) this negative divergence should not be overlooked. One must be ready for any surprises even when your gut feeling tells you otherwise. It's the chart action that is the real thing, not what "should be" happening.
Gold is below its long term moving average line with the line now negative and continuing to get more so. The long term momentum indicator is still slightly positive and very close to the level from which the last major rally occurred. Volume is negative but not a great indicator for long term moves. I use it mainly for intermediate and short term market direction. Putting everything together, I can only be neutral on the long term until that $410 price is reached or a new rally gets going.
INTERMEDIATE TERM
First I look at the intermediate term P&F chart. We now have the action down to the solid support at the $420 level. We are still under a bear confirmation signal and would need a move to $450 to reverse it. A move to $415 would reconfirm the bear but it is the $410 level that even here is the important one.
Looking at an intermediate term chart one sees an intermediate term moving average line that is oscillating but with lower and lower tops. On the chart that I am looking at (published in the subscriber's section of Merv's Precious Metals Central at www.themarkettraders.com) there is shown an intermediate term version of the Stochastic Oscillator. Fooling around with the oscillator parameters you can get almost any time period stochastic oscillator that you might want. This intermediate term version of the SO is almost at the point of entering its oversold level, but is not quite there yet. It is from this SO level that previous intermediate term rallies took place. The scenario of lower highs and higher lows has previously been mentioned. Maybe Friday's action is the start of a new rally and therefore giving us that next higher low. Time will tell. As with last week's rating I will stay neutral until a significant rally takes place or that $415 level is reached. Otherwise the lateral trend that has been going on since the start of the year will just continue.
I had been asked what chart is best to view to understand the market action. Well, no one chart is perfect but a several month period daily chart is very good. On it you can view everything from the short term to the long term technical information.
SHORT TERM
A short term P&F chart might look like a lot of jumbled Xs and Os to most people but it does relay a lot of good information as we progress. We are still in a short term bear with no indication of a reversal anytime soon. This bear projected to the $420 level and that is exactly where we are. Now let's hope that's the end of it. I dread the P&F going below that level in any significant amount.
Gold just touched its short term moving average line on Wednesday but reversed by day's end and dropped further on Thursday. Friday saw a little reversal but not much to speak off. Gold is still below its short term moving average line with the line aggressively pointing lower. Short term price momentum is still very negative but not yet into its oversold level. However, it is at the level now that previous rallies had taken place so this is one encouraging feature to grab on to. Recent volume action does not, however, suggest any underlying strength from waiting speculators. The action has been weak and on the down side. All in all, bearish on the short term is the only logical call.
IMMEDIATE TERM
The aggressive Stochastic Oscillator went oversold, came out of it and headed towards the neutral line but didn't make it. It is now once more heading towards its lower levels and possibly the oversold level again. Although pointing downward it is showing some strength versus the price action. I would not be too surprised if the first few days of the week were positive days for gold. How positive? Hell, I don't know, I just throw the darts and see where they land. If Swedish monkeys can predict prices that way why should us mere humans not try such advanced technology?
NORTH AMERICAN GOLD INDICES
The PHLX Gold/Silver Sector Index is probably the most popular North American gold index. It is the most often mentioned by media and analysts. It can be considered as the "quality" gold Index as opposed to the more aggressive AMEX indices. When looking at a chart of the Index what we see is a long term bull market that is still above its very gently up sloping trend line. Over the past 4 ½ years this Index has gained a little more than 110%. Compare this with the Merv's Gold & Silver 160 Index where the average of 160 stocks gained over 2500%, albeit over a slightly longer period. Compare also against my "quality" Index discussed below. The Merv's Qual-Gold Index gained 250% over the same time period as the PHLX Index. This is more than double the performance of the PHLX Index. Why the difference in performance? The answer is, in my view, the method of calculating the Index value. A few very large gold companies, because of their weighting, basically establish the Index value. The smaller companies in the Index, although far better performers, have next to no influence on the final Index value calculation. To understand what might be happening to gold stocks I prefer to go to my Indices and look there.
MERV'S GOLD & SILVER INDICES
The various Merv's Indices declined on the week with the rest of the North American Indices. However, their declines were less than the declines of these major Indices. Their short term ratings are all negative (bearish). Investors should hold off on any new purchases of gold stocks unless one is willing to take on extra risk. Wait for the short term to get better, we might have a bear market ahead and you don't want to be investing just as the market tanks. I expect a continuing bull but would not take the risk until the short term turns around. Unfortunately, due to space limitations, the short term technical information is not represented in the tables provided. The short term information is available for the Indices and all their component stocks in the Merv's Precious Metals Central (see below)..
Merv's Qual-Gold Index
Last week I discussed the overall Merv's Gold & Silver 160 Index. This week I will briefly discuss my "quality" gold stock index, the Merv's Qual-Gold Index. This Index includes 30 of the largest gold and silver companies trading on the North American exchanges. These are the "cream of the crop" of the precious metals group. This Index represents the average weekly performance of all component stocks within the Index without applying any extra weight because of the size of the company. You are buying a piece of paper called a stock certificate, you are not buying THE company.
Looking at the chart we see a bear market in the average "quality" stock from 1996 to 1998 with a 70% decline. Surprise! Hey, when we have a bear the good fall with the bad so I'm not sure where this idea of safety in the "quality" comes from. Another interesting feature can be seen on the chart, a 4 year lateral trend trapped between 10 and 20 on the Index. This can be considered as a basing period. The Index really took off in late 2000 and had a great run until the beginning of last year. Since that time it has moved sideways to lower. From the start of the bull up to this past week this Index gained 250%. Not bad in itself but pale compared to the average of 160 stocks and their 2500% gain (or 1050% since the end of 2000). The average "quality" stock now looks like it is leaning more towards the down side than the up side.
With such a wide disparity between the performance of the "quality" gold stocks and the more aggressive stocks one asks. "Who would invest in these stocks"? Well, unfortunately (in my view) there is a very large percentage of investors that invest in these "quality" stocks. They do so for a variety of reasons.
A very large group of investors rely upon their broker for market advice. Most major brokers lean towards recommending the "quality" stocks, these would be the stocks represented by this Index. There are philosophical and legal reasons that the major brokers are inclined to recommend the "quality" but this is not the forum for such discussion.
As for those investors that do their own investigations, a large majority are "conservative" investors who would not invest in anything except "quality" stocks, be it gold or technology or whatever. They do not want to "take risks". This group dilutes themselves because they are primarily fundamental investors and do not know anything about the timing of purchases or more importantly, the sale of securities. How many of these investors got out of the stock market in 2000 and into gold? Very few I would think.
There is that army of investors that think they are protecting themselves from monetary catastrophe by buying gold bullion or "quality" gold stocks. These are the ones who stick it out through thick and thin. What they get in the end is the thin.
As long as there are investors interested in "quality" gold stocks we should at least provide them with the means, via technical market information so that they can get the best bang for their "quality" buck. That is what the Merv's Qual-Gold Index attempts to do with the table of technical information and ratings. Unfortunately most of the "quality" gold stocks are short term bearish at this time. There are a few that have short term bullish (POS) ratings as well as being POS for their longer term investment time periods. These are the stocks that one would look at to invest, however, with the overall ratings for the group being NEG short term one would wait for a better, lower risk, timing. Forgo a possible minor profit potential and get in during a more positive investment climate. Unfortunately, as previously mentioned, the short term technical information for these Indices and their component stocks are only available in the subscriber's section of Merv's Precious Metals Central (see below).
The Index itself had been into a rally mode but is now turning back downward. Momentum is still negative and turning lower. From the Index action one would wait for more positive indicators.
Next week we will touch on the more speculative precious metal stocks (Merv's Spec-Gold Index) and the following week we will get into what a lot of speculators really want, the gambling stocks (Merv's Gamb-Gold Index).
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
18 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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