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LONG TERM
Well we now have a well defined level at which our long term P&F chart would turn back to the bullish side. A move to $690 would do it. However, there is still that down side projection to $480 (I think I said $490 earlier but it is $480) that has not been reached and it is not so far away as to be unreachable. Until confirmed otherwise I must stick with the trend and projections in effect so from the P&F stand point those are them, still a bear with a $480 projection.
The P&F tells us one story and the basic indicators tell us something else. We are still above a positive moving average line and the price momentum is still above its neutral line in the positive zone. I am developing an RSI "trigger line" concept to determine the + or - direction of the RSI filtering out the daily ups and downs on the chart. Today, that trigger line is telling me the direction of the RSI is negative within the positive zone (or - POS). The volume indicator is still above its long term moving average line and the moving average line is still sloping upwards. Unlike the P&F, which is bearish, the normal indicators are still bullish.
In the past I have had the normal indicators showing a trend reversal while the P&F did not. Now we have just the opposite. Which should we place greater reliance upon? My long term P&F has produced very accurate results over the past several years so I would say one should not ignore its message. In addition, although the normal indicators are still bullish they ARE HEADING towards the bearish side. It could be that the P&F is just that much ahead of the game. It's a toss-up as to which you go with until both are confirming each other. In times like this the intermediate term becomes more important.
INTERMEDIATE TERM
I ask you to go back to the intermediate term P&F chart that I showed here two weeks ago. It showed a trend that was bullish and had been since the start of the bull market a few years back. It is still so. However, should the price action drop to the $575 level it will then be giving us the first bear signal in years. It is unusual for the longer term P&F to reverse direction before the intermediate term has done so but there you have it, the intermediate term P&F is still, at this date, bullish.
Now for the normal indicators. These can be seen in the chart above. On Friday the price of gold dropped below its intermediate term moving average line. The line slope has also reversed back to the down side after a short flirtation on the up side. The momentum indicator is just a tiny bit above its neutral line but with a trigger line sloping sharply downward (- POS). One more day of negative price action and the momentum will go - NEG. The volume indicator is still above its moving average line but the line is tracing a horizontal path, neither upwards nor downwards. More upside volume action is required or else this moving average may turn down.
The most important indicator is the price moving average. It is negative. However, everything else is basically still on the positive side although barely so. From this I would be inclined to rate these indicators as being neutral at this time, awaiting better confirmation from these indicators. Overall, with the P&F still bullish one might give the intermediate term a rating of NEUTRAL.
SHORT TERM
In the previous time periods we had some good news along with the bad. Looking at the short term chart and indicators it is hard to find any good news here. Probably the most important item is the warning I had been giving for the past few weeks about the lack of volume on the rally. Unlike the increased volume at the start of the move in late march or the previous move in late November, this rally just had no appreciable volume to thrust it upwards. Rallies rarely last long without that volume thrust behind them. We are now seeing the collapse in trend. All indicators are suggesting the short term trend has now shifted to the down side.
The price is now below its moving average line and the line has turned down. Short term momentum has now moved below its neutral line into the negative zone. Its trigger line is also sloping downward for a - NEG momentum rating. The volume indicator has dropped below its short term moving average line but the line is still slightly on the positive slope side. Looking at the daily volume action, mentioned earlier, we see that since the end of May we have had only one day when the volume action went above the 100,000 mark and that was on a down day. It seems that professional speculators are not yet comfortable with the price of gold and are probably waiting for still lower prices. Maybe that long term projection of $480 is not so difficult to expect.
In addition to the usual indicators we have both an up trend line and support line to address. The Friday action broke through the up trend line and just touched the support line but stayed above the support. Putting everything together we now have a chart with a definite bearish short term trend. That support should be broken momentarily. If it is not broken within the next couple of days then we might start to suspect a new rally ahead.
The next week or two is expected to be on the down side BUT things have a tendency to change so watch this space each week.
IMMEDIATE TERM
As for the next day or two, well everything looks like down side action is the most likely. We have the price below a negatively sloping moving average line and a Stochastic Oscillator that, although just slightly above its neutral line, has a trigger line that is very negative. We should see negative action in the next few days BUT should the price reverse and close above the $650 level a reversal of action might then have taken place.
It's been another one of those baaaaad weeks for the North American gold Indices. Losses of 8% being the norm. But still, it looks like the long term bull is still intact but the intermediate term is having problems. This week we look in on the Toronto gold Index, the S&P/TSX Capped Gold Index. The term "capped" indicates that the Index calculation has limited the maximum weight that any one component stock can have towards the calculation of the Index value. For the S&P/TSX Capped Gold Index the weighting is capped at 25%. That is, no single component stock can have a weight of more than 25% towards the Index value. Well, golly-gee, that really makes the Index more representative. For an Index with about 20 stocks, each component stock should have an average weight of 5% BUT here we are capping the weight for the largest stocks at 5 times that weight. I wonder what weight the smaller stocks have, 0.05%?
What we see in the TSX Gold index is an Index that is still above its long term up trend line but has just moved below its long term moving average line. The moving average line is still slightly positive. Long term momentum is still positive but moving lower fast for a - POS rating. On the long term we are still bullish but ready to change on a moment's notice.
The intermediate term is something else. The Index is below its negative sloping moving average line while the momentum has now dropped below its neutral line for a - NEG rating. Put the two together and we have a bearish intermediate term chart.
Now to see if the Index can hold above its up trend line.
As with the major Indices, it's been one hell of a week for the Merv's Indices. Most Indices are still above previous lows but the two most speculative Indices, the Gamb-Gold and Spec-Silver, are now at new lows since the start of the reaction in May.
I have been hesitant to recommend any stocks as purchases for some time now and we see why. Reading one of the major newspapers this week-end, one article jumped out at me. An "investment strategist" was recommending investors transfer their capital into consumer or staple stocks because he can see further downside in the market and these kinds of stocks should decline the least. Does anyone see the problem here? If this "strategist" sees further declines in the market why not get his clients out and just hold on to the cash until the decline is over. You can then buy more stock with the same capital than you could right now. Also, who ever recommends a stock, or groups of stocks, because they will decline the least? But what really frosts me the most is that this kind of recommendation is not unusual, in fact it is more on the typical side that you will get from the top echelon of main stream analysts. Now you can see why "most investors are mostly wrong most of the time".
MERV'S GOLD & SILVER 160 INDEX
What a wipe-out this past week. 140 stocks (or 88%) on the decline and only 15 stocks (or 9%) on the advance. You can't get much worse than that. Looking at the charts we see that the intermediate term indicators are a disaster area. This is true for all of the Merv's Indices. Here, the Index is below its negative sloping moving average line with a momentum that is below its neutral line and pointing lower. On the long term we have the Index just below its moving average line but the line slope is still slightly positive. Momentum is still in its positive zone but pointing down and not long before it goes negative, if we continue to have lost weeks.
As for the summation of individual ratings, all three time periods have us in a bearish mode. On the short term we are only at 51% bearish, on the intermediate term we are at an 84% bearish and on the long term we are at 66% bearish. These ratings all moved lower (or higher negative) this past week continuing to suggest that buying precious metal stocks is still extremely risky at this time.
MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV'S GAMB-GOLD INDEX
I've started to lump these three sectors in one analysis since they are moving together with minor variations. I don't need to repeat myself.
The Qual-Gold Index had a really bad week with no advancing stocks and 100% declining. The Spec and Gamb-Gold both had only 7% of the stocks advancing and 93% and 80% declining respectively. Looking at the charts all of the Indices are the same on the intermediate term (except for a minor difference in the Gamb-Gold). All of the Indices are below their negatively sloping moving average lines and all but the Gamb-Gold have momentum that is in the negative zone and pointing lower. The Gamb-Gold has a momentum that is also pointing lower but is situated right on top of its neutral line. On the intermediate term they can all be rated as bearish.
On the long term there are small variations. All three have momentum indicators that are still above their neutral lines but in a negative slope. The Qual-Gold is below a negative moving average line while the Spec-Gold below a positive sloping moving average line. The Gamb-Gold is still the strongest Index from a technical indicator stand point. Its long term is still bullish with an Index above its positively sloping moving average line and a momentum that is positive although pointing lower. The Qual and Spec-Gold Indices may be rated as bearish, or at best - Neutral while the Gamb-Gold can still be rated as bullish.
The previous four Indices involved stocks from the general precious metals group. There are, however, many investors who think that the metal silver may provide better opportunities than the general group or gold itself. For that reason I have provided two Indices that address stocks that have a silver interest. One includes the 10 top silver stocks and the other includes an additional 25 stocks with some silver interest but not necessarily major silver interest.
Looking at the long term P&F chart of silver one could become bullish as it has made a bullish reversal break. There are two troubling aspects of this break. First, the normal indicators and charts do not yet confirm such bullish view. Second and somewhat subjective, if one does a P&F count to assess the potential for this move one gets a projection of $12.50, only $0.75 above the break-out point. This suggests a very weak break-out requiring much more back and forth action to provide a better projection. Put those two points together and one would be suspect as to the longevity of this break.
As for the normal indicators, although silver had been showing greater strength than gold for some time, it is now showing greater weakness. I guess what goes around comes around. All the intermediate term indicators are on the negative side while the long term indicators are still on the positive but barely so.
MERV'S QUAL-SILVER INDEX
Well, as with the other Indices, the rally appears to be over and we are once more into the bear. Although not the worst decliner it did drop 7.5% on the week with 9 out of the 10 stocks declining. The chart is not too comforting at this point. For the intermediate term we have the Index below a negative moving average line with a momentum that is also below its neutral line and pointing lower. Nothing here to cheer about. As for the long term, it is just a little bit better but not by much. The Index is below its negative moving average line but the momentum is still slightly above its neutral line. Long term, it may not be all out bearish but close.
Looking at the overall individual component ratings we still have a neutral short term rating (i.e. neither bull nor bear has more than 50%) but do have bear ratings for the other two time periods. Intermediate term has a bear rating of 80% as does the long term.
MERV'S SPEC-SILVER INDEX
The speculative silver stocks had been the driving force for the past year, they are now once more the driving force but on the down side. With a weekly loss of 9.0% it was the worst of the Merv's Indices this past week (equaling the loss in the AMEX Gold BUGS Index). It also has the worst short term Relative Strength rating in the table of Gold Indices and is second worst in the intermediate term (Qual-Gold being the worst there). The chart of the Index shows a most severe drop into new low territory with no end in sight, at least not right now. Despite the severe drop the long term indicators have not fully reverted to the bear side. As with the Qual-Silver Index, the momentum of the Spec-Silver is still slightly in the positive zone although heading towards the negative fast. The Index itself is already below a negative long term moving average line. On the intermediate term all is negative.
With 88% of the component stocks declining and only 8% advancing on the week one can guess that the overall component stock ratings are in the basement. Short term we have a bear rating of 54%, intermediate term a bear rating of 92% and long term a bear rating of 76%.
NOT YET THE TIME
Patience, patience. Profits in the speculative game are not made by wanting to be in the action all the time. Those with patience to hold off and wait until the time is ripe are most likely to make the huge speculative gains AND with reduced risk. Many impatient investors (really, GAMBLERS) though they had a bargain when Nortel dropped 50% a few years back, but it dropped a further 50% from there and then another 50% from that point, and another 50% and another 50%.
Do not be impatient. Watch and wait. The time WILL come to be getting back in BUT you need to be prepared and not go to sleep and wake up only after the market has risen 100% or more.
That's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
23 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.