Due to limitations on some web sites there may be charts or tables referred to but missing in the commentary. An unedited commentary may be found at www.themarkettraders.com
LONG TERM
Once more we have the long term weekly chart going back to the start of this bull market in gold. Before getting into it, first we look to the P&F chart to see if there has been any change in its message. There's no basic change from the past few weeks. The last signal given by the long term P&F chart (both the $10 and $15 unit versions) was a bear signal. Attempts at rallies to get back into the bull have all failed. The P&F chart has established a very strong resistance level at the $670 to $675 level (again, depending upon the price unit chart used) requiring a move to either $680 or $690 to reverse the trend. It's far enough away from either price that we need not worry about a reversal within the next few days. It could take a few weeks of a reasonable positive market to get to those levels. Should gold move to the $600 level then we have a new support break that could take gold into new low territory below June's $550 low. BUT that's only the P&F method of looking at the trend. Let's see what the other methods tell us?
As mentioned in the past, technicians like to play games with their charts. Yes, I know, it's not video games but we go with what we have. Anyway, I thought I'd just change the indicators by a little bit from my usual. I like to use a long term moving average that is a 40 week weighted average (I sometimes go with a slightly more aggressive 30 week weighted average). The most popular average is, of course, the 200 day simple moving average or in its weekly charts, the 40 week simple moving average. There is a slight difference between the simple and weighted averages in that the weighted moving average places greater weight on the more recent data and therefore very often, in fact most of the time, it gives reversal signals slightly earlier than the simple average. But why 200 days (or 40 weeks)? I can't remember where the 200 days came from. Joseph Granville (the developer of the On-Balance Volume indicator) developed a trading technique around the 200 day moving average in the early 1960's but I'm not sure if he actually was the first to use that average, I somehow doubt it.
Since the year is divided into 4 quarters and each quarter has 13 weeks, why not use 39 weeks (3 quarters) as our long term period rather than 40 weeks? So there you have it, the chart with 39 instead of the popular 40 weeks used as the time period. You know, you couldn't even see the difference between the two moving averages if you had them on the same chart.
Although I like to use a 30 week Relative Strength Index (RSI) as my long term momentum indicator, why not a 39 week RSI as long as I'm playing around. So, there is the 39 Week RSI on the chart.
Half a page of discussion on something most would not even notice on a chart. It's called filling up space. Otherwise I might finish my commentary and have pages of emptiness left over.
So, what does this chart tell us? First, although gold broke above the moving average in early 2001 it wasn't until slightly after mid-year before the moving average slope turned upwards. It hasn't looked back since. Although gold has dropped below the moving average line a few times during the years since, the moving average stayed positive. There were a couple of times when the average line went horizontal but the action stayed comfortably above the long term up trend line (which is an important indicator when you have a good solid line). Momentum itself was showing increasing strength since the early 2001 period but it wasn't until late 2001 that it broke into the positive zone and stayed there. It has been in its positive zone ever since.
At the present time the price of gold is still comfortably above the 39 WMA line and the line slope is not showing any serious signs of turning. Momentum has been showing signs of weakness since last coming down below its overbought zone but not enough weakness yet to move it into its negative zone. This chart and indicators tells us that the long term is still comfortably BULLISH. How do we reconcile the message from this chart and that from the P&F chart? Well, although this chart and indicators are bullish the trend is TOWARDS the negative, but not there yet. Because of this trend along with the bearish P&F I had been NEUTRAL in my assessment of the long term. I will continue with the NEUTRAL rating until either the P&F reverses or the basic chart and indicators turn bearish.
INTERMEDIATE TERM
Now, here's that intermediate term P&F chart which is telling us a slightly different story than does the long term P&F. Here, we are still within the long term up trend from the start of the bull market. However, the positive picture is very, very close to turning negative. The action is sitting at a $615 support and a move to $610 would break that support and break the up trend for a bearish signal. We are still waiting for it. This is what makes technical analysis such an interesting art form. With the exact same data you can draw different charts and get completely different stories. We have the action far, far above its long term up trend line in the first chart but just on the line (or slightly below it) on the next chart. Even with two similar charts (P&F), using different price units and reversal criteria we get two different answers. It is very unusual after a long bull move such as we have had for the long term chart to go bearish BEFORE the intermediate term chart does.
As for the usual indicators, well, I am waiting for the action to break below that support that is shown on the P&F chart. We have been in a lateral trend for some months and the price has been oscillation above and below its intermediate term moving average line while the line itself has been going up and down. The price is once more below its moving average line and the line has once more turned down, but it's that support that is important. As for momentum, that has just moved into its negative zone for its lowest reading in over two and a half months. It is now below the level it was at when the price was at its support levels. Momentum suggests that the direction of least resistance is to the down side and the support will most likely be broken, sooner rather than later. The volume action is also showing favor to the down side.
On the intermediate term I find enough indications to turn BEARISH and expect the P&F to confirm this very shortly.
SHORT TERM
Well, on Tuesday it looked all rosy but by Thursday the rose hade wilted away and left us with another sad story. The short term action looks like it is skewed towards the down side, where it seems to be heading. The short term momentum barely got into its positive zone when suddenly it moved back into the negative. There just seems to be little interest in gold on the up side lately. That said, it therefore looks like more down side action ahead on the short term. The support shown at the $610 level is not expected to hold and we may be seeing a test of the June low shortly. Also expect to see some perk-up in the volume action but this may not necessarily be on the good side.
IMMEDIATE TERM
Let's see now, last three days were down days, price is below its very short term moving average line, the moving average line has turned down, the Stochastic Oscillator was in its overbought zone but quickly reversed and is now even inside its negative zone and pointing lower. What is there to say? The next day or two is most likely to continue what we have seen in the past few days, barring some sudden global war or peace action somewhere.
It's the turn of the AMEX Gold Miners Index again. Let's see what it looks like.
First, we still have a valid, although somewhat skewed, Head & Shoulder (H&S) pattern. The right shoulder is getting somewhat elongated but it is still valid. What makes this a valid H&S from my perspective is the continuing weakening in the momentum indicator. When we have a sharp rise in the price into new high territory but the momentum does not confirm, then we have the makings of a potential H&S. All that is then required is a bottom to form the neckline and the right shoulder. Both we have although not perfect.
Over the past few months we have been developing an upward sloping wedge pattern (as the right shoulder). This pattern usually breaks on the down side and continues its decline. We had an upside break but it was very weak and only a one day wonder. It is now ready to break on the down side and that is expected during the week. One might be inclined to expect a good rally from these levels as the Index is sitting on top of both its intermediate and long term moving average lines but I am more inclined to see this as further weakness and a prelude to a break. Momentum has been no help. During the three month advance one would have expected the momentum to have reached a higher level than it has. Weakness shown here.
It's been one lousy week for the precious metal stocks. Looking at the Gold Indices table everything was negative except two items. The US $ was positive on the week, no surprise as it usually moves counter to the price of gold. The other positive was the FTSE Australian Gold Index but with only 4 stocks it's not much of a representative Index.
The Merv's Composite Index of Precious Metals Indices, introduced a few weeks ago, was showing a rising wedge pattern similar to that we see in the AMEX Gold Miners Index. It broke above the upper wedge line last week but has moved back inside the wedge and heading lower. The chart of this Composite Index has a H&S pattern but unlike the Gold Miners pattern this one has the neck line sloping upwards, i.e. the right shoulder is higher than the left shoulder. I have some question whether this is a good H&S pattern due to the action of the momentum indicator. Using a long term indicator there was no weakening in momentum as the Index made its head. There is, however, a weakening shown when I use a more aggressive momentum such as the intermediate term momentum. Maybe the pattern is there from an intermediate term standpoint, not a long term.
MERV'S GOLD & SILVER 160 INDEX
I am still debating with myself about changing the name of this Index. Maybe something like Merv's Precious 160 Universe Index might be more appropriate or something along that line. Anyway, the debate continues. When I debate myself I seem always to be at a disadvantage and end up losing.
The Index lost 1.4% on the week, which was about a third the loss of most of the major North American Indices. Looking over the various Merv's Indices this lower loss can be attributed to the fact that the more speculative stocks lost very little while the "quality" lost the most. Since the majority of the universe is speculative stocks their influence can be felt the greatest. Despite the week's loss the Index is still above both its intermediate and long term moving average lines and both lines are still positive. Although not any great shakes, both of the momentum indicators are still in their positive zones but continuing to show weakness. From chart analysis both time periods can be considered as still bullish although some differences can be seen with the mathematical process that develops the table ratings.
As for the breadth indicators this week, well as one can imagine the negatives took over. In the overall universe there were only 51 gainers on the week (32%) while there were 101 losers (63%) almost a 2 to 1 ratio on the down side. As for the overall individual stock ratings, only the short term showed a noticeable change. There the rating went from a bullish 58% to a NEUTRAL rating with neither bull nor bear in control. On the intermediate term the rating moved only slightly from a bullish 58% to a BULL 53%. Same small move for the long term, from a neutral last week to a BEAR 52% this week.
MERV'S PRECIOUS METALS SECTORS
MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV'S GAMB-GOLD INDEX
Here we see what sector in the gold stocks was moving and what wasn't, or more precisely, what was moving the least. The Gamb-Gold Index closed 0.8% lower on the week while the Spec-Gold closed 2.2% lower and the Qual-Gold Index closed 3.0% lower. The higher you went in "quality" the lower the weekly performance had been. One should not make much of a one week performance but it just shows that not always does the "quality" perform the best. Looking at the charts of the three sectors they all are showing the same thing. All Indices are above their intermediate and long term moving average lines and both lines are pointing upwards. Momentum for both time periods are still in their positive zones for all three sectors. Chart wise, we are still in a bull phase for both intermediate and long term for all three sectors.
As far as the advance/decline issues in each sector are concerned we had almost a complete reversal of last week's performance. This week we had 10% gainers and 90% losers in the Qual-Gold sector, a 20% gainers and 80% losers in the Spec-Gold sector and 33% gainers with 50% losers in the Gamb-Gold sector. Again, this follows the pattern mentioned above where the higher the "quality" the poorer the performance. As for the overall individual component ratings, the major moves were in the short term Qual and Spec groups. All other ratings moved lower but not by any great factor. Intermediate term wise, which is the time period of greatest concern, we are still at a BULL 63% for the Qual sector, a BULL 60% for the Spec sector and a BULL 58% for the Gamb sector.
Although silver continues to out perform gold when looking over the past few months it did take a beating this past week with a loss of 5.9% (versus gold loss at 2.4%). The P&F chart shows a support at the $12.75 level and a move to $12.50 would give us a down side break. Such a break would project back to the $9.50 low of last June. We'll just have to wait and see what transpires. The action this past week has taken silver back to the support up trend channel line shown last week. It would take very little extra downside to break below that line from here.
MERV'S QUAL-SILVER INDEX
With only 10 component stocks in this Index I wouldn't place too great of an emphasis on its results but it's the only game in town so we have to check it out. The loss on the week, at 2.7%, was close to the Qual-Gold loss and among the worst of the Merv's Indices. Despite the drop during the week the Qual-Silver group is still one of the strongest groups among the Merv's Indices. As with all the other Indices the Index is well above its intermediate and long term moving average lines and the lines are well fixed in the upper direction. Both momentum values are positive for a still all around bullish position. This does not detract from the weakness continuing to be shown by the momentum indicators. These indicators need to strengthen for the positive trend to have any longevity. This comment goes for all the Indices.
Only one issue closed higher with 9 closing lower. This resulted in a negative move for the ratings except that the intermediate term rating actually improved. SilverCorp had a good week with an 8.6% gain. This changed its individual rating from -N to POS and caused the overall intermediate term rating to improve.
MERV'S SPEC-SILVER INDEX
Along with the Gamb-Gold, the Spec-Silver had the best performance this past week with only a 0.8% loss. As with the other Indices this one is above its moving average lines and the lines are positive. Momentum indicators are also positive but as mentioned above, showing signs of weakness. These momentum indicators should be showing a lot greater strength if the Indices were in great shape.
The advancers/decliners were in a 50/50 situation with 48% in each case. All of the overall ratings lost a little bit of ground but nothing to worry about yet.
WEEKLY RECOMMENDATIONS
I know many of you are just aching to get back into the game and wanting to see some buy recommendations you can grab on to. The market environment still seems to me not to be in a very strong position. Yes, I know that the various Indices are rated as POS or BULLISH and most intermediate term stock ratings are POS but there just seems to be a weakness in the price movement strength that doesn't yet sit well. Intelligent speculation is when all or most of the conditions in the market are on your side. Pure gambling is throwing caution to the wind. Intelligent gambling is taking extra risks but understanding the risks and going anyway. In the past few weeks I have been providing the occasional "intelligent" gambling buys (Bravo Ventures is up 135% since being recommended a month and a half ago). Those are the only kind of recommendations I can provide for now, until the environment proves to me it is time to get more fully in the game. That time will come, maybe next week, maybe in a month but it will come. You can gamble in the mean time if you wish.
Well, let's call it another week and see what happens next week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
11 September 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.