Technically Speaking with Burak
Mervyn Burak, CMT
It was a real WOW kind of week for gold and gold stocks. Oil didn't do so well but it had its hey-day earlier. So, what's in store for this week.
GOLD
Well, here we are, a solid break above previous highs and into new bull market highs. As mentioned before, this break initially projects to the $560 level and then on to $600. I mentioned $640 last week but a recalculation gives me only the $600 level on this break.
A quick lesson in calculating projections using P&F charts. Let's take this break-out. We count the number of columns from the break-out column to the wall on the left. Here we have two walls, the first is the wall that gave us the previous high that was just broken and the second wall is the wall from the previous consolidation break-out move back in 2003. The first count gives us 7 columns. We multiply this number by the value of a unit and then we multiply that answer by the unit reversal criteria. We have 7 columns times $10 Units to equal $70. We then multiply this $70 times the 2 unit reversal criteria to give us a move of $140. To this we add the basic low during this consolidation period which was $420. Our first projection is therefore $140 plus $420 to give us a $560 projection.
For our second projection we can count 11 columns. Therefore 11 times $10 times 2 gives us a move of $220. The lowest basic price during this period was $380. Our second projection is therefore $220 plus $380 equals $600.
We don't have to worry about earnings, sales, interest rates, U.S. $ value and direction, war and pestilence or any of that kind of stuff. We just look at a simple P&F chart, count columns, multiply and voila, the answer. Now one might say "That's Crazy" but crazy or not it has been working for longer than any of us have been alive so why argue about a good thing.
Now, you might want to know how accurate these projections are, after all, nothing is perfect in this world. In my humble opinion these simple P&F projections, whether made using Futures, Indices or stocks, is about the most consistently accurate method of assessing a potential price move after a break. There has been research made into these projections with accuracy dependent upon the kind of pattern that preceded the break. My estimate is that the INITIAL projection after the INITIAL trend reversal break is accurate about 75 to 80 percent of the time. As a trend progresses and new projections can be made, these have a tendency to be less accurate until somewhere down the road a final projection is not met and a reversal occurs prior to its attainment.
Let's just go back to the beginning of this bull. We have the initial long term reversal break-out in 2001 at $300. Here we have an original count of 6 columns giving us a move of 6 X $10 X 2 = $120. The low was $260 so we have an initial projection of $380. Now this move continued and gave us a more extensive break-out at the $330 level. A count across this consolidation zone gives us 16 columns. So our next projection move was 16 X $10 X 2 = $320. The low is still the same $260 so the second projection was $320 plus $260 = $580. This is where my long term projection of $580 was coming from. Surprise, it is right in the middle of today's new projections so one has a strong probability that these projections will be met. I wasn't expecting such a lengthy dissertation on projections so let's get back to the basics.
Gold is well above its long term moving average line with the line having turned nicely to the up side. Price momentum is positive and heading higher. Everything is in sync on the positive side therefore I remain BULLISH on the long term.
The intermediate term is looking just as good as the long term. With the upside break during the week the intermediate term P&F chart is projecting to the $545 level. As you might expect not every P&F chart will give us the same projection. What does it mean when we have different projections? Well in this case one might expect that the move will take us to the $545 level at which time one might expect a rest period or maybe even a minor trend reaction before it continues on towards the longer term projection. The primary difference is in the time each projection will occur. The intermediate term should occur first followed some time later by the long term.
As for the usual indicators the price is well above its positive moving average line and the price momentum is heading higher inside its positive zone. The momentum is now above the level of most of the past several months but just slightly below the level of the previous Dec top. We'll have to wait and see if this momentum equals that of the previous one or maybe even exceeds it but a slightly lower momentum is not necessarily a serious thing. Just an indication of slightly lower strength but that's about all. One must watch and gauge these things as they occur. Volume activity is quite strong, well ahead of its level during the earlier price top.
All in all, one can only remain BULLISH on the intermediate term.
NORTH AMERICAN GOLD INDICES
Since May all of the major North American Gold Indices have been on a tear. This past week they all made new recovery highs. They are all bullish from the long and intermediate term. Short term is still a trend in motion but for how long before a short rest or reaction is not yet clear. However, today I thought I'd just show one of the lesser known Indices rather than one of the "majors". One such Index is the Dow Jones Gold, Silver and Platinum Index.
DOW JONES GOLD, SILVER and PLATINUM INDEX
Although the Dow Jones Gold, Silver and Platinum Index is not yet in the table of gold Indices I expect to have it in soon. It pretty well tells the story of the gold Indices since the lows of May. Since then it has been a bullish period except for a couple of month rest period. This past week it has been up, up and away for the Index and for all North American gold or precious metals Indices. Looking at a longer term version of this chart we see that this Index has had two previous tops, both in the same basic area, between 228 and 229 (you can see a similar situation in the PHLX Gold/Silver Sector chart). Should this Index close at or above 230 this would be a major upside break, confirming what we had in gold itself. So, it's one more day to see if it breaks out.
MERV'S PRECIOUS METALS INDICES
The world may look towards the major North American Gold Indices to see what's happening to gold stocks but we look at the various Merv's precious Metals Indices. Here we get a better idea of the action in precious metals stocks and see which types of stocks are moving and which are not, or at least which on the average are not. These various Indices have their own tables of information that I use to obtain the information discussed below.
MERV'S GOLD & SILVER 160 INDEX
We first have a look to see how the overall universe of 160 precious metals stocks, that I follow every week, have done. The Index as a whole has done well during the week but the average gold stock was just shy 0.5% to 1% in overall performance versus the major Indices. So we first see that overall the gold stocks performed just a hair less well than the major Indices suggest. But we are looking at a different type of gold stocks since the 160 Index is made up of all the large companies but mostly the smaller ones. Are the smaller stocks holding back the performance? We'll see later.
Looking at the table we see that there were almost 4 stocks gaining on the week for every loser. This is a good ratio on the plus side. The next thing we look at is to see how many REAL winners there were and how many REAL loser. For this I use an arbitrary 30% cut off point. This suggests the scale of speculation we might be having in the market. Although there were many stocks in the 20% winners area there were only 4 stocks that gained more than 30% and no loser of such magnitude. This is not really such a large number of stocks and suggests that the real speculative fever is yet to come.
Lastly we go to our % BULLISH / BEARISH ratings and find that for all three investment time periods the overall BULLISH rating is in the low 70% area and the BEARISH rating is at the 20% level, give or take a %.
All this suggests that the majority of precious metal stocks are starting to move higher, slowly, but they have not yet gotten to the fever pitch level.
MERV'S QUAL-GOLD INDEX
Going over to the quality gold stocks we see that their weekly performance was the best of the Merv's 3 specialty groups. It still looks like the quality stocks are where the action is, in general.
Looking at the winners and losers, we have 28 winners to only 2 losers again demonstrating that this is where the action is at the present time. One other figure is the percentage of stocks that can be classified as bullish versus bearish. Here we have all three time periods BULLISH over the 90% level and BEARISH in the low single digit. Nothing demonstrates the bullishness of the quality stocks, at this time, more than these figures. This is where the action is.
MERV'S SPEC-GOLD INDEX
Representing the "second tier" of gold stocks (by my definition) this Index includes 30 of the next largest stocks traded on North American markets after the Qual-Gold Index. These may be looked at as the speculative stocks but not to the level of outright gambles.
Here we see the diminished performance versus the quality. With slightly lower winners to losers ratio than the quality, at 24 winners and 6 losers, the big difference can be seen in the BULL/BEAR ratings. With the BULLISH ratings in the 70% area and the BEARISH in the 18% to 20% level, this group is just about at the overall average level.
MERV'S GAMB-GOLD INDEX
Although a very large segment of the universe of 160 stocks are of the gambling variety I have tried to pick 30 as representatives of the group. Here we see that the gambling stocks, in general, are not yet in a speculative mood. This group had the lowest weekly performance, the poorest ration of winners to losers and the lowest overall BULLISH ratings of any of the groups. With only 17 winners and 11 losers it was only a little better than a tie. With BULLISH ratings in the 58% to 60% level the group is barely into the bullish camp. BEARISH ratings are still in the 30% levels.
What this group DOES HAVE are the individual spectacular performers. One of my individual recommendations last week, Crosshair Exploration, gained 90% on the week alone. But these are still few. Most of the gambling stocks are building strength for THEIR moves. They will come. Are you ready?
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
18 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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