Technically Precious with Merv
The first full week of trading in three weeks has been kind of positive but not all that bullish. Speculators are slowly dragging themselves away from their vacation spots and greater trading activity is expected over the next few weeks. For now, let's see where we are.
Head & Shoulder (H&S) or Reverse Head & Shoulder (RH&S) Patterns
H&S or RH&S patterns are quite common. There is, however, some difference of opinion as to when we have one or not. First, you don't really know if you have a potential H&S or RH&S pattern until the trading is well into the right shoulder. That's no big deal as you are looking for the confirmation of the pattern by a neckline break, which would still occur sometime after. The difference of opinion sometimes comes in defining if the pattern is REALLY that of an H&S or RH&S or some other pattern that may look similar.
Although I'm not sure if you will find this in any of the technical text books but I have a simple way of defining if the pattern is that of a potential H&S or RH&S or not.
For a pattern to be an H&S pattern the trading activity leading to the left shoulder and the head must be a bullish trend. In addition, the distance from the start of the bullish trend to the top of the head should be greater than 2 times the distance from the head to the neckline. Just imagine standing with your arms hanging down. The bull trend starts at your left hand finger tips, climbs up your arm to your left shoulder and then to the top of your head. The trend then starts down to your right shoulder, breaks below your neckline and moves into a bear trend down your right arm.
For a pattern to be an RH&S pattern the trading activity leading to the left shoulder and the head must be a bearish trend. In addition, the distance from the start of the bearish trend to the bottom of the head should be greater than 2 times the distance from the head to the neckline. Just imagine the previous condition but with the body rotated 180 degrees. The bear trend starts at your left hand finger tips, drops down your arm to your left shoulder and then to the bottom of your head. The trend then starts to climb up to your right shoulder, breaks above your neckline and moves into a bull trend up your right arm. Note the short term gold chart later in this commentary.
In my view you CANNOT have an H&S pattern if the trading activity leading into the pattern is a bearish trend or have a RH&S pattern if the trading activity leading into the pattern is that of a bullish trend.
So much for today's lesson, now onward to the weekly analysis.
I like to keep my charts simple and understandable. That's one reason I like P&F charts.
Boy, we came this close to going fully bearish on the long term chart. We had (and still do) the first break, which was below two previous lows. The final confirmation would have been on the break below the primary up trend line. That was close and we are into the present rally. We're not out of the woods yet but do have a good breathing spell. A move now to $1065 would confirm a new bear market per the P&F chart. Otherwise, we continue in a bullish path above the primary up trend line and below the up trending resistance line (the thin red one). Our upside projections still stand at $1575 and then on to $2050, although there is a secondary projection to $1375 along the way.
Gold remains well above its positive sloping moving average line. The long term momentum indicator remains in its positive zone. It had dropped below its trigger line and the trigger had turned downward recently but this past week's positive gold action has changed that and the momentum indicator is once more above its positive sloping trigger line. The volume indicator has remained in a basic positive trend during the past month of price weakness and remains above its positive trigger line. All in all, on the long term the rating for gold remains BULLISH.
December was a little scary from the intermediate term. We were very close to going fully bearish but the action turned around just in time and we are back into positive phase. This week gold has once again closed above its moving average line and the line has once more turned upward. The momentum indicator remained in its positive zone throughout but did move considerably lower during the previous month. It is once more on the climb and finished the week above its positive sloping trigger line. During the latter part of December the volume indicator had snuck below its trigger line but this past week is once more above its trigger. The trigger line remained in a positive slope. On the intermediate term the gold rating is back to a full BULLISH rating. It should be noted that the short term moving average line has not yet crossed above the intermediate term line for confirmation but is heading in that direction and should cross within another day.
We have here a short term RH&S pattern per the definition provided earlier. Now, one might say that the action to the left of the pattern was a bullish action and nullified the definition BUT the emphasis is on the action that leads directly into the left shoulder and head. This is confined to the action inside the box. We have a bear trend leading into the left shoulder and head. From the top in early Dec to the bottom of the head is about $153. From the bottom of the head to the neckline is about $68. The greater than 2 times criteria is present and the pattern is a potential RH&S pattern. It will be a confirmed RH&S when it breaks above the neckline. Once confirmed, this pattern would project a move back to the previous early Dec top for a short term move.
The short term momentum indicator has also developed a RH&S pattern and has already broken to the up side. The more aggressive Stochastic Oscillator was even more emphatic with its ever more positive pattern of a higher low at the head area for a positive divergence. It continued its positive message to this day but is now into the overbought zone.
For the short term gold has once more moved above its short term moving average line and the line has turned upward. The momentum indicator is leading the price and has already moved above its previous highs. It has moved into its positive zone and is above its positive sloping trigger line. The daily volume action has improved somewhat during the week but is not yet at a level one would like to see it at. All in all, the short term rating is back into a full BULLISH rating.
As for the immediate direction of least resistance, one might be too quick to say the up side. Everything is positive but the Stochastic Oscillator moving into the overbought zone should cause one to be cautious. The up side seems to be the path of least resistance but I would not be surprised if we have a day or two of lateral or even slightly negative action before the trend continues on its upward direction.
Back in 2008 silver dropped from the $19 area down into the $8 area in just three months. Since then it has taken over 14 months to just get back to where it had been in mid-2008. Although a bullish trend is in process it sure is a mild one. In any event, silver looks to be out performing gold again. This week's 9.6% gain versus gold's gain of only 3.9% highlights this performance. The silver stocks are also out performing the gold stocks, as seen in the Table at the end of this commentary.
Silver had spent most of last month below its short and intermediate term moving average lines but above its long term line. The intermediate and long term momentum indicators remained in their positive zones Last month while the short term momentum reflected the weakness in the price action during that time. Today all three momentum indicators are now in their positive zones and moving higher. As with gold, silver has a BULLISH rating for all three time periods.
PRECIOUS METAL STOCKS
Next week I hope to have my yearly Index performance review showing the performance of the various Merv's and North American Indices. It's been a pretty good year for all of the Indices but especially for the Merv's Penny Arcade Index, which advanced 682% year end to year end. I have been mentioning for some time that as long as the Penny Arcade is doing well we are far from turning into a bear market for the general list. This week the Penny Arcade advanced another 13.6% so the bull market continues.
A more complete review of the stocks should be posted in next week's commentary.
MERV'S PRECIOUS METALS INDICES TABLE
Well, that will be it for this week.