Technically Precious with Merv
The gold topping activity continues with the price moving sideways while momentum keeps getting weaker and weaker. Something's bound to break soon, will it be up or down? I hate to say it but at this point my money is on the down side, but will change fast should gold close above the $1075 mark.
As Detective Friday would say, "Just the facts ma'am". Limited time this week-end so I'll just cut to the chase.
No change in the long term P&F chart versus the previous weeks. Still BULLISH.
The gold price remains above its positive sloping moving average line and the momentum indicator remains in its positive zone just barely above its positive trigger line. The momentum is showing signs of weakness although more pronounced in the other time periods. The volume indicator continues to show strength and is at all time high territory, showing no sign of weakening. The long term rating therefore remains BULLISH.
The intermediate term indicators are starting to slowly indicate possible changes ahead. The gold price continues to move sideways but remains above its positive moving average line. The momentum indicator is showing weakness and has started moving lower. It has crossed below its trigger line and the trigger has turned downward. However, the indicator is still in its positive zone and not yet in danger of dropping into the negative zone any time soon. The volume indicator remains in a positive trend and above its intermediate term positive sloping trigger line. All in all, the intermediate term rating remains BULLISH.
Two things are very clear in the short term chart. First is the topping process of the gold price, shown as a lateral move after barely any upside following the move into new high territory. The other is the weakening momentum, during the lateral price move, shown by the short term momentum indicator (13 Day RSI).
A weakness in the momentum indicator is actually normal after a sharp upside move by the underlying price and especially if the price then goes into a lateral trend. One thing this could be saying is that the strong move by the RSI cannot be maintained while the price is moving sideways. The longer the price moves sideways the more the momentum will move towards its neutral level. This is normal. It could also be a foretelling of a market top. I mentioned last week that a move into new all time highs should have been immediately followed by a move at least 20% above the previous high level. We only moved a couple of % which suggests a lot of selling and shorting going on.
As I understand it the open interest represents primarily short sales. If that is true then from the day before the break-out into new highs to this past Thursday the open interest increased by 61,507 contracts representing 6,150,700 ounces of gold shorted. If we assume an average price of $1060 during this time that suggests a total of $6,519,742,000.00 involved in this shorting process during only the past couple of weeks. Boy, someone has a lot of money to waste.
If we look at the daily chart we see that the price of gold started its move on the first of Sept. The open interest started its sharp rise at the same time. It had increased 132,129 contracts since the first of Sept. That's 13,212,900 ounces of gold. At an average $1000 per ounce we're now over the $13,000,000,000.00 mark of short sales.
The total short interest is 516,832 contracts representing 51,683,200 ounces of gold which represents $54,841,043,000.00 worth of short sales at Friday's closing price. WHO has that kind of money? And WHO has that amount of gold to short? Or are these just naked shorts with no gold behind it?
THINK ABOUT THAT
I'd better stop there, my head is really starting to spin.
Before I get too many emails about the above, I know it's not REALLY that simple but simplicity gets to the heart of the matter, even if it might be somewhat - well - simplified.
Gold closed just below its short term moving average line but the line remains sloping in an upward direction. The momentum indicator is moving lower and is below its negative trigger line but still inside its positive zone. The daily volume activity has improved over the past few months but not out of the ordinary or expected range. For the short term the rating has been downgraded to a - NEUTRAL rating, just one level above a full bear rating.
Since breaking out of its down trend last Dec, at $11.00 on the P&F chart, silver has been in a steady climb with a couple of rest periods along the way. The initial break gave us two projections, one to $17.50 and another to $18.50. We made one but not quite the other (silver got as high as $18.12 so far). It looks like we might be into another one of those rest periods again. We have a negative divergence in the momentum indicator which too often precedes a reversal of price trend. A move back to the $16 support level would be easy although the $15.00 is more likely. In any event, any rest or reaction here is not expected, at this time, to be of major concern and the up trend would be expected to return.
PRECIOUS METAL STOCKS
What we see in the universe of 160 gold and silver stocks (see the Merv's Gold & Silver 160 Index) is a universe that is struggling with its all time high levels. The previous high was reached in Feb of 2008 and the universe exceeded that level last week. This week it just meandered below. It did hit an upper resistance trend line so one could have expected a reaction. The big question is if it is a major stumbling block to further advances or is this just a short nuisance along the way to greater heights? Well, the long term momentum indicator has been well into new highs versus the previous Feb 2008 highs. This suggests that the latest move does have strength behind it and any rest or reaction should be short lived with the up trend returning. How much of a reaction? Well, I would not expect the reaction to go as low as the lower support trend line might indicate, maybe a 10% to 15% correction. However, as a technician I will let the continuing market action tell me what it's up to.
MERV'S PRECIOUS METALS INDICES TABLE
NO COMMENTARY NEXT WEEK
I will be on the move for the next week or two and therefore there will be no commentary during that time. I will try and get a commentary in for the week ending 06 Nov 2009, otherwise the next commentary will be for the week ending the 13 Nov 2009.
Well, that's it for this week.