Technically Precious with Merv

By: Merv Burak | Mon, Feb 1, 2010
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The week has seen no major moves in gold, either way. However, the price is sitting right on top of a support area and a move either way would be telling. We can have all sorts of fun with charts one view is a move to $1140 could project to $1600, a number very much in vogue.

GOLD

LONG TERM

Gold has been toying with that $1075 support level in the past couple of days. As mentioned last week the $1065 to $1075 area is an area to watch. Depending upon the chart one looks at you need to close below $1075 to break below support on one chart and need to trade at $1065 or below to indicate a downside break and a bear trend on another chart. Things do not look that encouraging for a turn around soon but anything can happen.

The long term P&F chart needs that $1065 move to show a down side break and a bear signal. Should that happen the move is not suggested to be of major proportion but only to the $975 level and not a major bear move. So, even if the price continues to go lower there is no need, at the present time, to panic. However, prudence would suggest that one not be holding stocks or the commodity if the prevailing trend is not in your direction.

As for the normal indicators, they are in the process of changing their message from the long term perspective. The gold price is still above its long term positive sloping moving average line but the two are converging and getting close. The momentum indicator still remains comfortably in its positive zone although it is heading lower, is below its negative trigger line and has already moved below its previous support area from the Dec lows. The volume indicator is holding its own and can be said to be trending in a lateral direction. It remains above its positive sloping trigger line although here too the two are getting very close. For now the long term rating remains BULLISH although trending negatively.

INTERMEDIATE TERM

The best thing that can be said about the intermediate term is that the gold price is sitting on top of support and has not yet broken below. It has shown a triangular pattern which is very often a continuation pattern but I wouldn't bet on it until the price broke the triangle at about the $1140 mark. Until then the technical indicators are not all that great. The price is well below its negative sloping moving average line. The momentum indicator has just inched its way below its neutral line into the negative zone. At a value of 49.97 it is less than the thickness of the neutral line below the 50% neutral level but still it has entered the negative zone. It is also below its negative sloping trigger line. The volume indicator continues to move sideways but has moved below its trigger line. The trigger has also just turned to the down side. Putting it all together the intermediate term rating can only be BEARISH.

SHORT TERM

The short term indicators are mostly a disaster. One can see some glimmers of hope for a rebound but let's just take it as it is.

With the price of gold below its negative moving average line, the momentum indicator in its negative zone below its negative trigger line and the daily volume action increasing on down days what good is there in the indicators? Well, from the short term perspective the momentum indicator seems to have bottomed out and is slightly higher than its level at the Dec low. This seems to suggest a slight internal strengthening in the price even as the daily closing price continues to close slightly lower. We will only know if this has any effect by waiting to see what happens next. It would be very encouraging if the price could remain above that $1075 support level. In the mean time the short term rating, at this particular time, is still BEARISH.

As for the immediate direction of least resistance, well looking at the Stochastic Oscillator for guidance it looks like things are firming up a bit. The SO had been in its oversold zone but has now moved above its oversold line and above its trigger line. This upward move is going on under a negative closing price trend suggesting internal strength getting stronger and possibly ready for a rebound in the price. I will go with the up side as the direction of least resistance although there still may be a day or two of slightly lower prices.

SILVER

Silver has been showing a greater degree of negativeness (is that a word?) than gold and is now below its long term moving average line. It has dropped below its Dec support level while gold is still above its support. However, it is still above its Sept and Oct support levels and may hold around these levels. The intermediate term momentum indicator is well inside its negative zone and heading lower. About the only encouraging indicator is the Stochastic Oscillator. As with gold, the SO for silver is in its oversold zone and appears to be in a turn around phase, even as the price is moving lower. This may be a precursor to a price rebound but we should wait for the action to happen and not jump the gun.

PRECIOUS METAL STOCKS

Gold and silver stocks have had a rough ride these past several days. The PHLX Gold/Silver Sector Index (commonly referred to by its symbol XAU) shows the recent decline. Although not perfect the Index does show a head and shoulder top with the neckline being broken this past week. Depending upon where you do draw the neckline (as mentioned, the pattern is not perfect) the down side projection seems to be to the 110 level. The drop may sound steep but it's only to the level the Index was at a few months back. Along with the Index break-down we can see that the intermediate term momentum indicator has also decisively broken into the negative area. I have shown a 65 Day RSI although I usually use a 50 Day RSI for my intermediate term. The two are almost identical and I thought I'd use the 65 Day RSI to compare with the weekly 13 Week RSI that I use for my weekly charts and for the Penny Arcade Index shown elsewhere.

Of course no one implies that technical analysis is perfect BUT one would be carrying a great deal of risk if one if invested in the market direction opposite to the direction that the technical indicators are suggesting. As I've often mentioned, if you are going to be wrong, be wrong in the direction of conserving capital, not wasting capital.

Many of you are already familiar with my Merv's Penny Arcade Index. It is an Index of 30 penny stocks which go through updates more often than stocks in most Indices due to their volatility. To be included into the Index the stock price, at the time of inclusion, should be less than $0.25. Once in it could stay there into the dollar range although once it gets out of the pennies it becomes ready for replacement, not that the stock may not still be a good buy but only because its price has risen too high for the Index. The Index was started at the beginning of 2007 and reached its high point in April of that year at a value of 1348. It then went into a year and a half bear market and started its new bull market as shown on the chart.

I now follow on a weekly basis 190 gold and silver stocks for my subscribers to the Precious Metals Central (check at the end of this commentary for a link to the web site), 160 in the basic "universe" plus the 30 penny stocks. Each week I review 6 stocks of interest, two this week are from the Penny Arcade Index and still show over a 200% potential move ahead using the P&F technique for gauging potential moves.

As mentioned above, the Penny Arcade Index topped out in 2007, about a year before the rest of the gold and silver stocks topped out. Although I have only a short history with this Index, and only one example of a bear market, it seems that these gambling stocks top out well ahead of the general market. Keeping this in mind, the Index does look like it is heading towards some sort of a topping process. The intermediate term indicator has been showing weakness in the trend since its low in July. Although the stocks have been making continually higher levels the indicator has just not been able to keep pace. It has continually shown lower highs and lower lows, as the Index moved ever higher. This week the indicator made a new lower low and more importantly, has now moved below its overbought zone indicating a possible down trend ahead. Although there will always be stocks moving counter to the general trend it does look like the general trend for the Pennies, as well as the general market, is to the down side.

Merv's Precious Metals Indices Table


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Well, that will be it for this week.

 


 

Merv Burak

Author: Merv Burak

Merv Burak, CMT
Hudson Aero/Systems Inc.
Technical Information Group
for Mervs Precious Metals Central
www.themarkettraders.com

Merv Burak

For DAILY Uranium stock commentary and WEEKLY Uranium market update check out my new Technically Uranium with Merv blog at www.techuranium.blogspot.com

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 and their component stocks plus other publications of interest to gold investors. While at the themarkettraders.com web site please take the time to check out the Energy Central site and the various Merv's Energy Tables for the most comprehensive survey of energy stocks on the internet.

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