Technically Speaking with Burak
Weekly Commentary
(For week ending 2 Dec 2005)
Mervyn Burak, CMT
GOLD
Like they say, it just keeps on trucking. Where it ends up nobody knows but with enough "experts" giving their views someone is bound to be right. I can only judge what my technical charts are telling me. On the long term, they are still telling me that the price continues to head towards the $600 mark. But the charts don't tell me when that will happen. There has been some action on the long term P&F chart (not shown here) since last I showed it but nothing has changed in my long term P&F analysis. The trend is still very much bullish and based upon the criteria that the plot has to move below two previous lows, as one criteria for a reversal, that reversal is far away. I doubt if the price will ever get back to the previous support at the $420 level. Gold has gone up almost $100 without a reasonable rest or lateral trend period. One can expect the upward move to take a breather soon, but when? Let's let the charts tell us when it happens.
As for the normal bar or candlestick chart indicators, well the price continues above its positively sloping moving average line and the price momentum is well within its positive zone. In fact the momentum has now exceeded its previous early and late 2004 highs on a daily chart but is still below those levels using a weekly chart. From my perspective the daily chart is the more informative while the weekly chart, although usually giving the same information as the daily, does omit a considerable amount of intra-week activity and is therefore not quite as precise. The volume indicator is at all time highs, very positive, but here the daily chart action is not as aggressive as the weekly chart.
On the long term I can only remain BULLISH.
We are now only $5 from the minimum intermediate term price projection of $515 (see my comments two weeks ago) with a mid-projection at $530 and a further one at $545 still ahead. The P&F chart does not indicate any serious problems immediately ahead so we can still look forward to more upside but not necessarily straight up, no price goes straight up, at least not for long. This intermediate term P&F chart demonstrates that the simple criteria I use to determine reversals of trend (cross the trend line and move below or above two previous lows or highs) is not perfect but also shows that it does correct itself and gets back on track in time for the next real move (other than lateral). But I have also learned that to go against the simple criteria is fraught with considerably higher risk than normal. At the present time there is no doubt what the trend is, up, up and away.
It almost goes without saying that the price is above a positively sloping moving average line. The price momentum is also positive and finally has exceeded its previous Aug highs to nullify what was looking like a negative divergence. Unfortunately, the trend since the beginning of Nov has been almost a straight up move and cannot be sustained for much longer. It may yet surprise but do not be surprised if the price should go into a lateral or even negative trend. As long as it does not overreact a rest or reaction is good at this point. It will set up the price for its next move into higher ground. BUT at this point in the intermediate term indicators there is still no indication of such a rest. We'll have to go to the short and immediate term analysis to see what we are in for ahead.
On the intermediate term there is only one position, BULLISH.
Short term and immediate term commentary can be found in the Merv's Precious Metals Central subscriber's section.
NORTH AMERICAN GOLD INDICES
Despite the sharp rise in silver and the lesser but still good rise in gold, the North American Indices seem to say, we've had it for now. Except for some Merv's Indices, all major North American gold indices, representing stocks rather than the actual metal, were down on the week. They have had a fairly good run and a rest or even a short reaction is in order. This helps consolidate gains and strengthens the stocks for their next thrust into the upper reaches of the gold universe. We actually haven't looked in on the most popular of the major Indices for some time, so today we look in on the PHLX Gold/Silver Sector Index, with the symbol of XAU.
PHLX GOLD/SILVER INDEX (XAU)
If you compare the performance of the XAU versus Merv's Qual-Gold Index for the period 2003 to today you see a performance that is almost identical. However, if you go back to the start of the bull market for these Indices, in late 2000, you see a superior performance in the Merv's Indices from the 2000 low to the top in late 2003/early 2004. The XAU gained some 170% during that period versus a gain of over 300% for the Merv's Qual-Gold Index. As I've often mentioned, it may not be so much that the stocks in the Merv's Index performed that much better, it's only in the method of calculating the Index. I always maintain that if you want to know what the average stock in an Index is doing you need to calculate the Index based upon average stock performance not on a weighted method giving larger stocks greater weight towards the Index value. There is also another interesting difference between the two Indices. The XAU is still some 25% below the highs that it reached in 1996 and 1987 while the Merv's Qual-Gold Index is above its previous highs. The Qual-Gold is some 50% above its 1996 high and 100% above its 1987 high. As the XAU continues to advance it will need to really move through those previous 1996 and 1987 highs in the 150/160 area. Gold itself is now well above its 1996 high and has just crossed above its 1987 high. This underperformance of the XAU even versus gold is curious as stocks usually far outperform gold bullion due to a magnification effect on earnings. Technically, I am interested mainly in what is happening now and not what happened years ago, although it is all interesting to note.
MERV'S PRECIOUS METALS INDICES
Within the Merv's group of Indices it wasn't a complete loss on the week. The overall universe of 160 stocks gained on the week. In addition, the Gamb-Gold and Spec-Silver Indices also had a positive week. So, all was not lost.
MERV'S GOLD & SILVER 160 INDEX
As mentioned above this Index had a gain on the week, even if only 0.10%. It is still within that two year lateral channel but getting closer and closer to an upside break-out. However, I am concerned that this Index of 160 precious metal stocks has not kept pace with gold. It is normal for the stocks to be acting in anticipation of the gold movement. Does this mean that the traders, speculators and professionals consider the recent gold price move to be a false move? Maybe it's just that the enthusiasm level has not gotten to the level of extreme speculation and the majority of stocks in this Index are of the speculative kind. We will have a better idea when looking at the specific gold groups below.
Looking at the overall breadth of the week's activity we find that the losers outnumbered the gainers by 87 to 61. How come there were so many losers versus gainers but still we had an overall plus in the Index performance? That was because we had three stocks with gains over the 30% threshold while no losers even came close to that level. The Gold Indices table of technical information still has this Index rated as POS for all three time periods. This is also confirmed by the overall BULL/BEAR % performance with a 56% intermediate term and 66% long term BULL rating. The BEAR ratings are 33% and 28% respectively. So, there is still no need to panic and it just might be a good time to look over stocks to be getting ready for the next major moves.
MERV'S QUAL-GOLD INDEX
With gold ahead 2.6% and silver ahead 6.4% on the week it is almost a surprise that the quality stocks dropped by 1.8% on the week. And this drop in the Index was not due to one or two losers but a general loss across the group. We had 23 losers and 6 gainers during the week to indicate the general weakness in the quality section. However, there is no need to get too concerned. The decline was to be expected, regardless of what gold did. The group has had a terrific advance since its May bottom and the Index was just touching the upper trend line of an aggressive channel from which one would have expected a reaction. In addition, with a short term BULL/BEAR % rating of 97% last week, there was very little upside strength left in the stocks, for now. So, we accept this reaction and hope it is a good opportunity for the stocks to consolidate their moves and gain strength for the next thrust.
MERV'S SPEC-GOLD INDEX
The worst loser in the Merv's groups during the week, the Spec-Gold Index lost 2.6%. It had 4 losers over the 10% level and this alone accounted for 1.5% of the total loss. The rest came from a general malaise throughout the group. At 10 gainers and 18 losers it was not as bad as the Qual-Gold group but as indicated, the losses were of a greater magnitude.
This group is still the laggard of the Merv's groups and is far from its previous 2004 top. As with the Qual-Gold group, this group is moving inside an upward trending channel and is close to the upper trend line. However, the channel is considerably less aggressive than the Qual-Gold channel. With BULL ratings of 63% and 67% for the intermediate and long term periods there is more room for upside activity here but this also shows the greater weakness. These ratings, along with the overall 160 Index ratings, continue to suggest that the speculative fever has not yet taken hold. Speculators are still not all that comfortable with the gold movement. Maybe once gold goes through $600 they will start to really speculate. I would hope they do so a lot sooner.
MERV'S GAMB-GOLD INDEX
As far as speculation is concerned, the Gamb-Gold Index can be seen as representing the gambling extreme end of the speculative spectrum (the Spec-Gold Index may be seen as the least speculative end of the spectrum). Here we see an Index whose performance lately has been even less impressive than the Spec-Gold Index. It is still some distance from its previous high although such high is from earlier 2005 activity not 2004 as for the other Indices. With BULL ratings of 40% and 58% for the intermediate term and long term and BEAR ratings of 45% and 38% respectively, this Index is not all that bullish at this time. However, with 11 gainers and 14 losers this Index had the least of the bad performances over the week.
TECHNICAL ANALYSIS
As subscribers understand, all of my work is SOLELY based upon the charts using a variety of technical concepts. The charts, however, are usually either bar, candlestick or point and figure charts. This is for simplicity and ease of presentation. Of these the point and figure charts are often confusing to subscribers who may not be too technically oriented. In the past I had talked briefly and simply on the construction of the point and figure charts. Today I just thought I'd elaborate somewhat on the decision making of stock buy and sell decisions when such decisions are based upon the point and figure technique. It should be understood that my recommendations are not only based upon this technique. However, I do base many of the recommendations upon this technique, especially on the buy side for speculative "penny" gold stocks. I have, over the many years, developed a point and figure technique specifically for such speculative stocks that has proven to be very benefitial.
P&F BUY & SELL
The simplest of my buy criteria is that the price action must move above the established down trend line AND above two previous P&F highs.
The simplest of my sell criteria is that the price action must move below the established up trend line AND below two previous P&F lows.
That's basically it. How simple can you get? Of course I do have some additional criteria for situations that may come up on the rare occasion but this is basically it. Let's see how it has worked on a real live situation (of course I'm going to show a winning situation, I'm no fool).
Birch Mountain Res. (BMD) looks like a good P&F chart to use. The action shown is for the year 2005. With a short down trend early in the year BMD then consolidated and broke on the up side, based upon my simple criteria, when it hit $2.10 in late May. Although I wasn't in on the break I did end up recommending the stock a month later at $2.28 just before the real rise in price (see Issue 24 Jun 2005 of STOCK REVIEW - Technically Speaking).
Throughout the 5 month rise the stock has not broken below the basic up trend line. This line is drawn at what some call a 45 degree angle, but that is true ONLY when the chart is made up of perfect squares. Most often the chart is made up of rectangles with either the width larger than the height or the other way around. What the line really is, is a line whose slope is equal to that one would get by drawing a line from the center of one square through the center of another square which is one column to the right and one unit above the first square.
Now, in late Oct the price did break below two previous lows. If one had drawn a secondary up trend line (solid blue) then a bear signal might have been given at the $4.80 level. The stock quickly turned around and a buy back signal would have been given at the $5.50 level. I was lucky to maintain a stop loss just below all this activity at the horizontal dashed blue line level. So, we are still holding, 5 months after the initial buy, with a 230% profit. That profit would be slightly lower if the stock should now react and break on the down side. Since the action is now so far above the basic up trend line we might consider using the secondary one instead. That would give us a stop loss at the $6.70 level if we were to do that. In a situation such as this, one would take additional guidance from other indicators before acting.
There you have it, how P&F buy and sell works (well, we don't really have the sell yet but you get the idea). It is really surprising how well this technique works on the "penny" resource stocks. It also works on most other stocks but the real action, percentage wise, is so often in the "pennies".
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
5 December 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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