Technically Speaking with Burak
Mervyn Burak, CMT
Does the extreme volatility in the energy markets have any effect upon the direction for gold? What about the effect upon currencies? I'll leave these kinds of questions to much more brilliant minds than mine; I'll just stick to the mundane of following the markets and go where they tell me.
GOLD
It's been one hell of a week for gold. First a sharp plunge below the short term head and shoulder pattern followed quickly by a recovery well above the H&S neckline. All this portends something for the short term but let's get with the long term first.
The long term P&F chart has not budged in a couple of weeks. We still have those two crucial levels to watch from the long term standpoint. These are shown on the chart as the upper level at $460 and the lower level at $410. Whichever gets breached will tell us the next long term direction of gold. At the present the charts, both P&F and bar, would suggest we are in a long term lateral drift more so than in a bull or bear market. However, let's see what the indicators are telling us and decide after that.
Gold is above a normal (40 week) long term moving average line but the line is now gone negative, if only slightly. This is the first time that this moving average has shown two successive negative slope values in a row since the start of the bull market in 2001. Twice it had shown a single negative value before quickly turning positive again. The first time was in Oct of last year and the second was in Jan of this year. This weakness in the moving average goes along with the weakness in the price momentum values. The long lateral trend is taking its toll in the indicators. The price momentum (RSI) indicator itself is not all that hot. We had that negative divergence versus price action at the Dec 2004 top and since then the momentum has shown continuous weakness, although not yet a decisive negative. As for volume, using the weekly chart to filter out the day to day fluctuations, the On-Balance Volume indicator is going great guns since the beginning of the May 2004 rally. We get a somewhat different picture by the use of daily data but I'll look at that in the intermediate term analysis. I don't know how much credence to place on this volume information as I'm always suspicious about volume for long term analysis. Volume is too often a lagging indicator at market tops and could hold back a reversal declaration for too long if one were waiting for volume confirmation.
Although I agree that the long term position for gold is most appropriately defined as NEUTRAL, if one were required to make a decision, bull or bear, I would have to stick to a long held concept that a trend in motion stays in motion until a reversal is confirmed. Since we still do not have a confirmed reversal, I would therefore remain BULLISH.
Moving on to the intermediate term P&F chart we see some action last week but none of any significance. The last P&F signal was a bull signal and that's where we remain. The same upper and lower barriers can be seen on this chart, i.e. $460 and $410. Again, remember I am using the Dec futures contract prices for my data at this time.
As for the normal indicators, gold broke below its positive sloping moving average line on Tuesday but quickly turned around and is well above it by the Friday close. Price momentum remained in the positive zone throughout the week despite the sharp drop on Tuesday. The volume indicator was below its intermediate term moving average line for most of the week but recovered on Thursday (the last day of volume data).
On the intermediate term nothing is all that bullish despite the sharp rise in price in the later part of the week. From the indicators I must remain BULLISH on the intermediate term but am only half hearted about the stand at this time. Breaking the upper barriers would be an enormous mind easer.
NORTH AMERICAN GOLD INDICES
Today we look in on the AMEX Gold BUGS Index, probably the most aggressive of the major North American Gold Indices (apart from the Merv's Indices) although the relatively new AMEX Gold Miners Index may take its place in the future.
I have had a question concerning the use of the Candlestick Charts. There are literally dozens of books written about the use of this plotting technique and its interpretations. I do not intent to go into any detail here except to explain very simply the construction of the candlestick chart.
The construction of the Candlestick chart is no different than the construction of a Bar chart --- except for its construction. Now, how's that for double speak?
As with the bar chart, the extremes of the candlestick chart are the daily (or weekly) high and low prices. The body of the candlestick, that rectangular mid-portion, represents the opening and closing prices. When the closing price is higher than the opening price the body of my charts will be green. When the closing price is lower than the opening price the body of the candlestick is red. These are the colors I have chosen for my charts. Other analysts or software may color the bodies differently or none at all. There are other nuances to the candlestick, such as when is the inside of the body a solid color and when is it white, but they are not critical. There you have it.
AMEX Gold BUGS Index
We had a sharp bounce in the Index on Wed and Thur but that bounce seemed to have ended on Fri. As the chart shows, we have a nice FAN Principle trend lines except that the third FAN line is still questionable. However, a bounce off the third trend line took the Index into the upper zone to nullify the initial bear signal given when the Index closed below the second trend line in mid-Aug. The short/intermediate term MACD price momentum indicator is interesting in that it just came down to its neutral level before the bounce. The bounce, so far, has been underperforming the price action putting a damper in the bounce itself. As for the other indicators, the price is above both its short and intermediate term moving average lines and both lines are sloping upwards. The short term just turned up a day or two ago. Other price momentum indicators are positive just as is the MACD. All in all, the AMEX Gold BUGS Index may be considered as still bullish but the Friday's action is a concern for its longevity.
MERV'S GOLD and SILVER INDICES
The various Merv's Indices gained on the week along with the other major North American Indices. However, one can gain a better perspective as to what is moving by comparing the various Merv's Indices where you cannot get this perspective from the majors. As an example, although the Merv's Qual-Gold Index gained 5.0% on the week, similar to the majors, the Merv's Gamb-Gold Index gained only 2.7% (and the Merv's Spec-Gold Index gained only 2.5%). What this shows, in a nutshell, is that the action is still in the larger "quality" gold stocks and the more speculative are still, on the average, holding back. As I have mentioned before, this is good as the speculative stocks get going only after the masses really have gained confidence in the market. Once they get going, however, they far outperform the "quality" making up for any delay in their start. So, if one is confident that we are into a new bull phase of the gold stock market now is the time to be picking up the speculative and gambling stocks before the REAL rush.
I wouldn't go into Index by Index detail review, suffice it to say that it was a good AVERAGE week although there were fewer stocks gaining those spectacular 30% and higher weekly moves. Only two stocks made gains in that order this week. One was our old favorite gambling, potential 10 bagger, St. Elias Mines which gained 48% on the week making the total gain since my July first recommendation at over the 100% mark.
The only other comment Re: the Merv's Indices, is to highlight the fact that although the Merv's Gamb-Gold Index gained only 2.7% on the week it was the ONLY Index, Merv's or major, that made a new recovery rally high.
Reading the Info table
For a tutorial on reading and benefiting from the technical information in the table please go to the www.themarkettraders.com web site and access the SAMPLE section of Merv's Precious Metals Central. There you will find the tutorial as well as samples of the component tables of the various Merv's Gold and Silver Indices.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
5 September 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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