The long term P&F chart just keeps on trucking and is still pointing towards that $600 level, or thereabouts. Nothing much new there.

The weekly chart, a bar chart for a change, shows a new high peak activity almost every year since the start of the bull market. One problem with such peak activity is that every time we have had it there followed several months of downside to sideways activity. It also continues to show momentum weakness since its peak almost two years ago. How long this continual weakening can continue is anyone's guess. But at some point it must improve or the trend reverses. However, the price is well above its moving average line and momentum is way inside its positive zone so we don't have to worry about any long term reversal of trend for some time yet.

On the long term it is obvious that the trend remains BULLISH but that peak activity aftermath is worrying.

The intermediate term is my preferred time period for gold and gold stocks. It just seems that it's easier to determine trends in this time period. Looking at the P&F chart (not shown) one can see the bull trend in progress. Except for a little clitch at the early part of the year when gold dropped to $415, we have been in an intermediate term trend for a year and a half now. Although we now have strong support at the $465 level, the price would have to drop still further before it crossed the up trend line. The P&F trend continues towards that next intermediate term level of $545.

Looking at the basic bar chart we still have the action "boxed" in between $461 and $483, or if you wish, we still have a developing head and shoulder pattern with the neckline at the $461 level. Take your pick of patterns. The recent action, however, may be viewed more as a lateral trend with a weakening price momentum but with momentum still inside the positive zone. Volume is showing weakness and is below its intermediate term moving average line but the moving average line is still sloping in the upward direction for a positive reading, i.e. positive but showing weakness. As for the basic price action, it is above its intermediate term moving average line with the line showing a positive slope.

All in all, I am still BULLISH on the intermediate term. The level to watch for a change of trend is the $461 level.

This week I show the PHLX Gold/Silver Sector Index dating back to the start of the gold bull market. What you see here is the most popular North American "quality" gold Index having gained less than 200% over the past 5 years. Last week I showed the AMEX Gold BUGS Index which is the most popular "speculative" gold Index. It showed a gain of 500% over this same period. By comparison we have the performance of the AVERAGE gold stocks in these same categories with the "quality" represented by the Merv's Qual-Gold Index gaining in the order of 350% and the "speculative" represented by the Merv's Spec-Gold Index with a gain of over 2000% in the same time period. This is not to say that the stocks in the Merv's Indices performed that much better than the stocks in the popular Indices. It's just the method of calculating the performances of similar groups of stocks, but by different methods. Unfortunately, the performance of the popular Indices reflects the performance of the few most heavily weighted stocks in the Indices and not the performance of the overall group of stocks. The smaller stocks in each popular Index have very little effect on the Index value but most often have the greatest REAL performance. It's good to know what the AVERAGE stock is doing for a general performance comparison.

For now the PHLX Index is still "boxed" in within a wide 2 year old box. The upper end is at about the 114 level while the lower end is at about the 76 level. As long as the Index stays within this box we will continue to have a lateral long term trend with very profitable intermediate term bull and bear moves interspersed inside such trend. It seems that we might be at the start of one of those bear moves now.

BUY & HOLD MENTALITY

The "buy quality and hold for the long term" mentality always amazes me. I grew up in the era of "quality". If one was to speculate in stocks one was immediately considered a less than an upstanding citizen. Speculation had a nasty ring to it. To show your high ranking in the neighborhood one would buy General Motors and hold for the rest of his life. After all, in those days General Motors WAS America and America WAS General Motors. If you were to be a little more aggressive you would buy International Business Machines for REAL GROWTH. This showed you to be an upstanding citizen but with a little bit of flare for the speculation, but not enough to make you into a real speculator.

As we are now learning maybe America is a little bit like bankrupt. At least General Motors is not that far from it. As for America I'll leave that to others to comment upon. Throughout the 21st century GM has dropped from the mid-$90s to the mid-$20s. Oh sorry, I forgot to mention the dividend. It was something like 2.5% at the beginning of the century and is getting close to 10% now. But wait a minute, if you bought the stock at the beginning of the century YOUR dividend is still 2.5% on your original capital. Only if you bought the stock today would you be getting a dividend on your investment capital close to 10%. AND with the present financial condition of the company how long will that dividend be available? How many are willing to bet that the present $0.50 quarterly payout will continue for very long?

And what about IBM? Well in my day it was a real darling, one of the "nifty 50". If my memory serves me correctly it rose to more than a nifty $170. Then over the next several years it dropped down to $40. Anyone who needed that capital for retirement over a 10 year period was seriously disappointed. Yes, it did bottom out and then FINALLY performed very well for a few years but what has it done lately? If you bought IBM almost any time over the past 7 years and "held for the long term" you are most likely in a losing position.

BUY & SELL MENTALITY

My mentality is that of a "speculator". Sometimes it's that of a conservative speculator and other times it's that of an aggressive speculator. The aggressive speculator is often referred to as a gambler. More on the true "gambler" at another time although the "quality long term buy and hold" investor referred to above would qualify.

My definition of a "speculator" (the buy and sell mentality) is one who bases his investment decisions on real time data and information and only continues with the investment as long as such continuing real time data and information validates the holding. Based upon the continuing data and information the speculator could hold the stock for years or sell the next day. My difference between a conservative and aggressive speculator is more in the quality, caliber and price activity of the stock than on anything else. To illustrate relative to gold stocks, any analysis relative to Barrick Gold ($27.00 range) could be considered conservative speculation while analysis relative to a real "penny" stock such as CanAlaska Ventures ($0.35 range) could be categorized as aggressive speculation.

A speculator with the buy and sell mentality will inevitably result in more trading activity. However, it also prevents one from holding losers as they drop 50% to 80% and allows one to hold as a stock climbs 200% to 400%. The buy and sell speculator takes quick and small losses and lets his profits run. As an example over the past 3 months I have had 1.7 losses for every profit but my losses have averaged only 17% while my profits have averaged 62% for a net average overall 3 month gain of 33%. As for the General Motors investor, well, enough said.

Sometimes I find myself just rambling on and on. I'll leave the weekly analysis of the Merv's Indices for next week.

Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group

www.themarkettraders.com
merv@themarkettraders.com

30 October 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.