Technically Speaking with Burak
Weekly Commentary
(For week ending 9 Dec 2005)
Mervyn Burak, CMT
GOLD
LONG TERM
Last week I showed the long term P&F chart so I guess this week it's Candlestick chart's turn to be displayed. However, the commentary always starts with a look at the P&F chart so close your eyes and just visualize what it looked like last week (unless you kept a copy for reference). It's the same old chart this week except for a couple of more Xs in the upward direction. Long term the P&F continues to point to the next major projection, and that is to the $600 level. There will be stops along the way, of course, as the intermediate and short term charts will show but that $600 looks clearer and clearer. This has been our long term projection (well, really $580) since almost from the start of the bull in very early 2002 and there is no need at this time to revise it. Hopefully that $600 level will not take too long and further projections can be made.
As for the candlestick chart and our normal indicators, things are looking better and better. Gold is far above its long term moving average line and the line is continuing to point upward. No real problem here. As mentioned last week, the momentum is now getting into new high territory. It is above the two peaks in 2004 and only a hair from exceeding the peak in 2003. Momentum is therefore nicely improving and any negative divergence worries I had in the past have dissipated. One thing to always keep in mind, reversals do not happen from the low point but from the high point so just because the momentum has improved and heading for higher ground we should not slacken our vigilance.
For now everything is coming up roses and I continue to be BULLISH on the long term.
INTERMEDIATE TERM
Looking at last week's P&F chart all we need to do is add an extra three Xs in the last column to get today's chart. It just keeps on getting better. It seems like only a few weeks ago I was talking about $530 as the average intermediate term projection and here we are. There is still the upper end of the projection, at $545. Let's see if we get to it very soon or if the price will decide to take a much needed rest and consolidate its gains. It could so easily come back down to the $490/$500 area but not to worry if that happens, it will be good as a strength builder upper. Using a different "counting" method from my usual I can get a further intermediate term projection to $550 but that is so close to the $545 that I'll leave the projections as is.
Looking at a candlestick chart and indicators I see the month long run in the price of gold. I also see the intermediate term moving average line trying to catch up but still some distance away from the action. Momentum is moving nicely higher and still some distance from getting overbought (from the intermediate term standpoint). It's always good to see when momentum is confirming the price movement. It tells us that the move has not yet lost strength and even if it should rest for a while, higher prices usually can be expected ahead. The volume indicator is still positive although it can be seen to be weakening. This goes along with the lower daily volume action as represented by the bars in the lower part of the chart.
When we put everything together there is only one prognosis for the intermediate term, still BULLISH.
SHORT TERM and IMMEDIATE TERM
Available to subscribers of Merv's Precious Metals Central.
NORTH AMERICAN GOLD INDICES
It was quite a week for the various Gold Indices. All advanced with % gains of 4.3% to 6.8% for the various Indices. The best performance was by the S&P Gold Index but hey, they only have one component stock so it is a one stock Index. Of the four major Indices PHLX Gold/Silver Sector Index did the best with a gain of 5.8% while the S&P/TSX Capped Gold Index was the laggard with a gain of only 4.3%. Again, of the four major Indices two, PHLX and AMEX Gold Miners are now well above their previous highs. The AMEX Gold BUGS Index is just barely into new high territory while the S&P/TSX Gold Index still has a way to go to get to its new highs.
The Gold Indices table tells the story of these Indices. All are above their various moving averages. All the moving averages are sloping upwards. All momentum indicators are positive as are all Technical Ratings. Only in the Relative Strength column do we see - signs. This indicates that those Indices, for those specific time periods, are underperforming versus the average performance of all the Indices.
When trying to compare the performances of the major gold indices versus the performance of Merv's Indices one finds that a direct comparison is difficult due to the varying component stocks in the different Indices. However, one could say that the PHLX and S&P/TSX Indices are representative of quality stocks and can be compared to the Merv's Qual-Gold Index while the two AMEX Indices, the BUGS and Miners, are more aggressive and can be compared to the Merv's Spec-Gold Index. By that criteria the Merv's Indices come out way on top in all categories. (No favoritism in THAT criteria, I think I'll stick to it).
Although the long term momentum of the gold action has become quite positive, exceeding its previous highs, the momentum for the various stock Indices are still seriously underperforming their Index action. The AMEX Gold Miners Index shown above is a good example. Index is into new all time highs but momentum is still far below the late 2003/early 2004 high. Reviewing the gold chart versus the Miners chart one quickly notices that the Index is underperforming versus gold. This is the reverse of what one would expect. Usually informed professional investors gauge the situation and buy stock ahead of the movement in gold. In fact, the Index performance should have a magnification factor on top of its move, versus gold. The suggestion here may be that either gold stumbles and loses ground or the Indices will zoom to catch up with gold performance.
MERV'S PRECIOUS METALS INDICES
Well, it's THAT time of year again. No, I don't mean Christmas (although it is that time of year also). I mean it's that time when I get down and do some work. It's the yearly review of the stocks time. I try to review the stocks in the various Merv's Indices at least twice a year and the end of the year is one of those times. I slowly and leisurely (hey, I'm not a glutton for punishment, I don't like to work either) go through all the stocks in the universe of 160 and the various specialty Indices to check if the stocks still qualify to be there, if new stocks should be included, if some should be discarded, etc. From my other universe of over 700 precious metal stocks (hidden away from prying eyes) I then filter through those and see which new ones can be included in the Indices. So far I have completed the easy part, the review of the Qual-Gold and Spec-Gold Indices. Both are simple to review as they have simple criteria for inclusion. The Qual-Gold includes the 30 largest North American traded precious metals stocks by market capitalization. The Spec-Gold includes the next 30 largest. Some statistics on these stocks will be mentioned in their individual sections within this commentary.
In addition to the above simple criteria for the Qual and Spec Indices, to be included in the universe of 160 there are a few additional criteria. First and foremost the stock MUST have an active North American trading history of more than a year. This is required to calculate some of the indicators in the tables. Come to think of it, that's it for the criteria for inclusion. I do try to include at least the largest 100 market capitalized stocks in the 160 Index. This makes up the 100 Index. The rest are picked by throwing darts at a list of stocks (well not quite but close). I try to include the latest movers and shakers, if they qualify. The problem in including some of the new companies that may be real winners is the lack of sufficient trading history. We can't have everything. In the end the stocks are picked primarily upon a review of their past trading activity and what that may imply for the future. Some zoom up while many others drop into nowhere land. The RATE(ings) in the tables will tell you if they could be considered for purchase or if they should be ignored.
The one criterion that IS NOT used in picking which stocks are to be included or excluded is any knowledge of fundamentals. I know NOTHING about company fundamentals, company business activities, management qualifications and style, sales, earnings, etc. I have thousands and thousands of investors doing all that research for me and are acting upon their research by buying and selling the stocks. This is reflected in the daily trading activity. I just read the daily trading activity and try to understand the message it is conveying. This is the essence of technical analysis. You do not need to know all that fundamental stuff, just to understand the language of trading activity. As with any language there could be errors of interpretation or misunderstandings but such is life. Nothing is perfect.
I hope to have the full 160 Index as well as the 100 and Gamb-Gold Indices reviewed and revised by year end in time for the new year. However, if it should take a week or so longer, well I never claim to be a workaholic.
MERV'S GOLD & SILVER 160 INDEX
The average gold stock did okay during the week, although not great comparatively speaking. With a gain of 5.4% the average stock was somewhat mid-way between the performance of the "quality" and the speculative. Overall we had 3 times the advancing issues as we had decliners (118 advances and 36 declines). It is almost hard to imagine that with a week such as we have had in gold that there would be any declining stocks, but there were, there almost always are. One interesting note when looking through the table of technical information for the 160 stocks is the lack of real outright speculation. There were no stocks qualifying for the over and under 30% moves. There were a dozen in the 20% range and many, many 10% movers but none into the real speculative range. Even in some of our more lethargic weeks we still had one or two that moved into that range. Interesting.
Although not evident in the chart of the Index, the Index did just inch above its previous high into new all time high territory. An achievement but not a great one when you think that gold itself is way into new high ground.
MERV'S QUAL-GOLD INDEX
As mentioned above, I have completed my end of year review of this Index and its component stocks and find that there is no change to the Index composition. What was there, is still there. Keeping in mind the merger activities that are on-going this Index will probably be revised as some of these mergers are completed.
Just some numbers which are probably meaningless but the AVERAGE market capitalization of a component stock in this Index is in the $6,600,000,000 range (that's $ 6.6 Billion Cdn). The company with the largest market value is Anglo American, worth some $55.8 Billion while the smallest company in this Index is NovaGold at $790 Million.
Looking at a chart of the Index shows the Qual stocks are well into new high territory. However, with a gain on the week of only 4.1% it was the poorest performer of the Merv's Indices. With 24 gainers and 5 losers the ratio was quite good but there were no real large winners in the group. Only one with a 17% gain. The rest far below 10%. Could this be the transition phase from quality domination to speculative domination? Time will tell.
MERV'S SPEC-GOLD INDEX
The other Index which has had its review completed with changes made. There were half a dozen changes made to the component list with still some more changes ahead as some mergers become finalized. The primary reason for most changes this time is the surge in market capitalization of some real aggressive stocks, such as Birch Mountain and Laramide. Some that have been on this list for a long time have been removed due to lagging behind in market value upkeep with the rest of the crowd.
The AVERAGE market capitalization of a component stock in this Index is just short of $ ½ Billion ($470 Million). The largest market value is in Royal Gold at $785 Million while the lowest value is in Orezone at $265 Million. As "speculative" stocks these are still no small potatoes.
As a chart of the Index shows, this Index is still some distance from its previous high although at a 7.0% gain on the week it is getting there fast. There were 27 gainers and only 3 losers on the week for the best ratio of the Merv's Indices.
MERV'S GAMB-GOLD INDEX
This Index has not yet gone through its yearly review and will be the last to be reviewed after the full 160 has been finished. I expect that this Index will have the greatest number of changes of the Indices. There is no real hard and fast criteria for inclusion into this Index, just a guess from a review of market activity that the stocks just might be the future spectacular performers. It's mostly guesswork so let the final RATE(ings) in the technical information tables suggest if they are good gambles or not.
With 18 gainers on the week and 10 losers this Index continues to lag behind in performance. However, it has just inched into new all time high ground and may be preparing for some real speculation. Watch this space.
A note on St. Elias. The stock was recommended as a "pure gamble" a few weeks ago. We lost the gamble. This is the difference between pure gambling and intelligent speculation. Pure gambling has no technical justification behind it and carries huge risk while intelligent speculation has technical justification and is therefore of a lower risk. Birch Mountain was an intelligent speculation when recommended at $2.28 and now still holding at $7.83 some 6 months later. You could still lose with speculation but not quite as often.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
11 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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