first majestic silver

Chart Symmetry

DeBeers; Randgold; Durban Deep; Harmony Gold

May 3, 1999

Chart Symmetry is designed around the observation that prices tend to change direction along certain preferred gradients. New readers are advised to read the first article in this series to discover how Chart Symmetry works. The link to this article is :

The prices shown for the lines are the values of the lines at the next time interval after the chart close. It is not a prediction that the price will suddenly move to reach that line overnight, but provides the reader a measure of the move that could take place if the price pattern does develop in the direction of that trend line. The steeper the line, the greater will be the change in the line value over time.

The key point to remember throughout is that the gradients of all secondary lines were derived from the gradient of the master line. The scope for the analyst to 'do his own thing' and develop a pre-conceived pattern is therefore quite limited. The patterns that are shown in the analyses are inherent in the charts, but these are not the only patterns that can be derived.

De Beers in US currency – calculated from JSE close. Daily close. (Last = $23.00)

The chart shows the same bear channel used in recent reports. Lines X - Z have a gradient that is the direct inverse of that of line M. The break above line A, followed by a return to A and a subsequent rebound, is a classical example of a 'goodbye kiss' after breaking from a major pattern – the bear channel A-M. Friday's close was just short of resistance at Y. Two Scenarios describe the possible developments.

Scenario 1: The price reverses direction at line Y to return to test support at line A for a second time.

Scenario 2:. The rising trend extends further after the goodbye kiss on line A. A break above resistance at Y has line X as target.

Preference: From just before Christmas last year, DeBeers has gained 110% in US dollar terms. This is an excellent performance.

Keep in mind that, as Ray and Zulugold have mentioned on the Gold-Eagle Forum, DeBeers has historically been the pathfinder in any new bull market in gold shares. Where DeBeers led, the gold mines tend to follow in due course.

The confirmed break upwards from the bear channel, A-M, is expected to extend much further. Scenario 2 is therefore preferred and this should be bullish for gold shares too.

Randgold in US currency (ADR). Daily JSE close. (Last = $4.32)

Randgold is moving higher and has now broken clear of the shallow bear channel, A-B, in which it had been trapped since late 1997. The upper boundary of that channel – like all other lines derived from the gradient of master line M – was resistance a little more than a week ago, but a new surge in the price has now taken it though and clear.

If the rising trend is sustained, the likely near term target is the top of the symmetrical megaphone I-B, with line I the inverse of B (now at $6.35). Megaphones tend to contain volatile moves, so that the rise to line I – if achieved – could be quite fast.

Scenario 1: The price fails to sustain the break above line A and falls back into the bear channel to resume the mostly sideways trend.

Scenario 2: The price moves higher – with first a goodbye kiss on line A a small possibility – to reach and test resistance at line I, thereby completing a new move across the megaphone..

Preference: The price in a sense 'had the opportunity' to remain within the bear channel on the recent trend reversal at line A, just before the break. The break higher, after a nice increase in turnover (on the JSE) to show good demand, holds promise of further gains, probably to resistance at line I. Scenario 2 is preferred..

Line I as top boundary of a megaphone should be more substantial resistance than line A. If the price should break higher on reaching line I, it would be a very bullish event.

Lastly, the moves within channel A-B and the recent bull trend in the price may seem of little consequence against the extent of the chart. However, the scale of the chart is enormous, due to the very high prices (up to $27.35) reached earlier (February 97). The width of channel A-B is about three times the value of line B; the recent rise in the calculated US price since the rebound off line B in December last year is all of 214%!!

Durban Deep in US currency. Daily close. (Last = $2.19)

After a good increase in price of 124% late in 1998, the price of Durban Deep entered a gradual bear trend, well contained in bear channel M-P, that eventually carried the price below key support at line F. (Note that these lines are closely similar to the chart pattern shown preciously for Durban Deep, only on a much reduced scale.)

While many other gold shares showed some substantial increases in recent weeks, DRD has lagged and only last week started a slight rising move. The increase over the second part of last week is almost 9%, but the decline in price from the recent high in March was nearly 30%, so DRD has some catching up to do.

The lower half of the chart shows the volume analysis for DRD, using the JSE turnover figures. The story this tells is a little disturbing. Blue bars are the turnover MACD; pink bars are the price MACD.

The increase in price in September/October last year started of very well indeed, with an increase in volume leading the move in the price. (A). Turnover kept on increasing as the price rose steeply, showing some profit taking continuing into the strong demand (B). Turnover did fall, eventually, while the price was still rising, but sellers remained active a little longer than what the model expects of a bull trend. Shortly after, volume surged again as sellers returned in quantity and this time the price peaked and started to fall (C) – the beginning of the 8 month bear trend.

On four occasions during the bear trend volumes jumped – presumably buyers coming into the market as DRD seemed to have reached a floor while other gold shares, and the gold price!, were showing signs of recovery. On almost every occasion the increase in supply – reflected in increased turnover – was sufficient to satisfy the new demand and the price failed to react in any substantial manner (D, E and F). On the one occasion when the price did react, (G) – in mid March when POG went to $294 – supply increased substantially, pushing relative turnover to much higher levels until the price cracked and subsided again, in sympathy with the fall in the gold price.

A fifth and very recent increase in turnover – new demand (H) – again failed to jump-start the price and in fact it fell even further. Right at the end of last week volume again picked up and this time had some effect on the price – a rise in the JSE price equivalent to a 9% rise in the US price.

The big question is whether the rising trend will be sustained this time.

The chart above uses the dPdV® indicator. The model on which the indicator is based and how the indicator is generated are explained in an article to be found at this link:

Scenario 1: The price extends the break through resistance at line F towards the top of the channel at line M.

Scenario 2: A new surge in supply quenches demand again and the price falls back below support at F towards the lower half of the bear channel.

Preference: The earlier behaviour of DRD suggests that there is a negative perception in the South African market about its prospects. The sustained selling into demand (B) when the price was rising, shows holders eager to sell – perhaps one large seller? – even though the price was showing promise..

Typically, when the price is rising steeply at the start of a what later proves to be a longer term bull trend, sellers quite soon retreat to the sidelines to wait for a much higher price – an event that is reflected in declining turnover and which keeps the price rising as buyers compete for the reduced supply. Here the decline in turnover was late, which means many buyers had already had their orders filled during the first half of the rise in price. When sellers soon returned in number, as can be seen from the new increase in turnover (C), remaining demand was quickly satisfied and the price declined.

Subsequently, a number of somewhat weak efforts to get the price moving again wilted quickly as buyers failed to make a dent in the supply of stock waiting in the wings. When buyers were more aggressive (G) and, helped by a better gold price, managed to get a bounce in the price, turnover remained very high until the price fell. Sellers did not react to the better gold price by retreating from the market, but kept supply high.

Under these circumstances it is difficult to predict a new rising trend in the near future until either of two things happens: firstly, until it negative sentiment among SA holders of the share – or of a single large holder – has been replaced by optimism, either on a steep rise in POG or, otherwise, by the resolution of whatever problem caused them to be negative. Secondly, until the holder(s) with a negative view of DRD have sold all their shares and the market can respond to fundamentals and normal supply and demand again.

The key to the answer lies in what happens to JSE turnover during the next week or two. If turnover remains high, while – hopefully – the price of gold moves closer to the $290 level, the price of DRD is unlikely to gain as much as its potential apparently promises. Volume has to fall away quite soon into any rise to show sellers retreating from the market in the face of firm demand. If this happens while the price continues to rise, the outlook for DRD becomes more promising. However, from what has happened over the past six months there has to be some apprehension that the large seller(s) are still waiting for an opportunity to get back into the market, thereby capping or restricting the increase in the price.

An analysis of ADR prices and turnover in ADR's would perhaps show a different picture, as it would reflect sentiment in the US. I do not have the data to do such an analysis, but IMHO the key play for DRD for the time being will take place on the JSE and not in the US. Based on the history presented here – and which might be in the process of changing – the picture is more negative than positive.

This is supported by an impression I had gained from posts on the Forum – that the ADR price of Durban Deep jumps overnight (SA time) in the US, only to find the next day the price seldom follows through on the JSE, but tends to come under pressure early on.

Harmony in US currency. Daily close. (Last = $5.75)

As usual, all the lines were derived from the gradient of master line M. After the steep fall into the low of late 1997, Harmony started to form a pennant, A-Y, which typically should become a continuation formation, i.e. the price should break lower from the pennant on leg 5. Later on, it formed triangle I-Y, also a continuation pattern.

The price has just broken higher from the triangle while on leg 5 of that pattern (if the slight short-fall from line I just before the cross-over with line A is taken as the end of leg 2). Leg 5 should really have ended with a break below Y. The break above I is therefore abnormal and such events often signal a strong and sustained move in the price in the direction of the break.

Scenario 1: A break above line B occurs quite soon and carries the price up to line A – to complete leg 4 of pennant A-Y.

Scenario 2: Failure to break above B has the price returning to the top of the triangle at line I, and perhaps even breaking lower into a resumption of leg 5 of the triangle.

Preference: The first reversal at line B failed to decline all the way back to line I. This is a positive sign and, together with the abnormal break from the triangle, swings opinion in favour of a break above line B. Scenario 1 is preferred.

Previous charts:

Gold price: There has been little substantial change on the chart of POG – the break from the steep bear channel on the weekly chart is widening and POG is also moving away from support on the rising trend line, now at $280.15. Key weekly resistance is at $295.25 for the PM fix this coming Friday (7 May).

US 30-year T-bond: The yield has broken higher on the weekly chart shown last week, where market support at 5.605% (now 5.60%) has kept the bear trend on hold for some weeks. The break upwards is quite substantial (closed at 5.66%). While recovery to give a goodbye kiss on the old market support level is a possibility, medium term prospects for the US 30-year are bearish. The longer term target is at about 6.18%.

The US T-bond in Yen was marginally weaker on Friday, but effectively still holding at long term support (actual value of the Yen price index – calculated as Dollar-Yen rate divided by yield on US 30-year – is now 21.1 vs the major support level at about 21.2). This maintains the vulnerability of the chart to a new bear trend, either on a new increase in the value of the yen or further weakness in the US bond market, or a combination of the two – a development that would have negative consequences for the US bond market.

Dow volume: Relative turnover on Wall Street dipped a little at the beginning of last week and the dPdV chart was beginning to signal a decline in the volume MACD while the price MACD remained high. This would have become a very bullish signal if the turnover had continued to fall. However, trading volume picked up substantially again and the volume MACD recovered to resume the warning of bearish potential contained in the price-volume relationship.

One problem with this analysis at the moment is that so many stocks on Wall Street are already in a bearish trend, and therefore subject to declining turnover, that the volume picture is being contaminated by the split personality of the US stock market. The fact that the dPdV picture holds well so far, shows that sellers are still out in force, using the opportunity offered by market indices rising on a declining number of stocks to sell into any remaining bullish sentiment.

Further high turnover this week until – and IF? – the Dow too begins to fall in earnest, would be bearish.

Previous Chart Symmetry analyses are in the Gold-Eagle archives and are accessible through the Index of Research/Top Analysts on the G-E home page.

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