Weekly Commentary

By: Merv Burak | Mon, May 1, 2006
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WOW! New highs again, Go GOLD, go SILVER, Rah, Rah, Rah. But are we near the start, in the middle or nearing the end of the game? Hell, who knows. Just enjoy the game while it lasts.

GOLD

LONG TERM

The activity is starting to look more and more like the activity in mid to late 1979 as gold was on its way to the $875 level. It's still not at the level of panic we had during that period but who knows, maybe we are more sophisticated these days and not as prone to panic as we were in the "good old days". If you believe that one I have some swamp land for sale.

Nothing much has changed in the long term picture from last week. Gold is well above its positively sloping moving average line and both seem to be pointing still higher. Price momentum is now moving into its overbought zone and one might expect some simmering down in the up trend, no reversal but a slow down at least. The long term momentum is at the highest level it has been at since the start of the bull in 2000. Maybe it will just continue as it did in 1979? The volume indicator (not shown on the chart) continues to move higher and higher on a long term chart but since Dec has moved in a lateral direction on the short and intermediate term charts. I go with the shorter term charts as a more accurate indication of volume action. The chart shows two channel trends, one relatively flat from the start of the bull market and one more aggressive since last July. The breaking of the first channel suggested a more aggressive trend in progress. However, the reaching of the upper trend line in the more aggressive channel suggests a slowing down ahead, even if for only a short spell.

All in all, I must stay with the BULLISH prognosis from the long term indicators.

INTERMEDIATE TERM

Gold continues its upward climb ever since breaking the relatively lateral trend prior to last July. The trek has been with somewhat of a constant momentum (strength). The 50% (blue line) level on the RSI indicator is the neutral line above which shows strength. The higher above the neutral line the indicator is, then the greater the strength. The trend since last July has been going at a 60% clip, plus or minus 10%. This suggests a move with steady strength, not too much and not too little but just about right. Even the sharp move of the past few weeks hasn't changed that. We are still just above the 60% level. It is a little surprising that the momentum did not shoot up into the 70% level with such a sharp rise, as it almost did in early Dec. This momentum action almost makes me think that there is still much, much more upward trekking ahead BUT trends never move in one direction for too long without taking a rest so, a rest is possibly in order just about now. The fact that the price is butting its head up against the upper channel trend line is another reason to suspect a cooling of the up trend. Should a cooling off take place then the first goal to watch would be the lower up trend line, which is also where the intermediate term moving average line is.

The chart clearly shows the lateral trend of the volume indicator. This is not normally a sign of strength during a roaring bull move. One would have liked to see this volume indicator pointing higher and higher to confirm the price move but that is not to be.

The past several days of price activity, although inching higher, still seems to be "bunching up" within a compact space, almost as if it has a hard time going higher. It will be interesting to take a look at the short and immediate term charts to see how this looks and what it tells us. In the mean time I continue to be BULLISH on the intermediate term until the action justifies otherwise.

SHORT TERM

The chart on the next page gives us a real good close-up of the action over the past few weeks. The action over the past several days is interesting in that, despite the volatile up and down moves, the trend stayed very much in a lateral direction. Only Friday's move took us out of that scenario. As for the short term momentum (strength) (13 Day RSI) behind the trend, that took a dive initially but then halted and remained at around the 70% level (which is an overbought level). As for the short term moving average line (the dashed red line), that has been moving up with the price trend and has remained positive throughout.

As long as the moving average remains positive and the action remains effectively above the blue up trend line I remain BULLISH on the short term. It WILL reverse, sooner or later, but nothing yet suggests that a reversal of trend (as opposed to a minor hesitation in the trend) is immediately in the works.

IMMEDIATE TERM

As with the short term moving average line, the very short term moving average line has stayed positive throughout the recent price climb from 5 weeks ago. The daily action has crossed the moving average line on many occasions but only once has the price closed below the line, and then barely so. This is probably where we will first learn of a reversal in progress.

The Stochastic Oscillator looked as if it was going to drop right through the neutral line but as with the short term momentum, it seemed to have stopped on a dime and reversed back to the up side again. It is once more inside its overbought zone and above its trigger line.

As long as the price continues to close above the very short term moving average line, and the line remains in a positive direction, we cannot be anything other than BULLISH on the immediate term trend.

NORTH AMERICAN GOLD MARKETS

Of the four major North American Gold Indices the best performer has been the AMEX Gold BUGS Index. On a short term basis it has even out performed 4 of the 7 Merv's Indices with the overall Merv's 160, the Gamb-Gold and the Spec-silver still continuing to dominate. During the week all of the major Indices moved higher but did not match the gains of gold itself. Not a good sign as there should be a magnification factor at work with the Indices moving more than gold, percentage wise. We may be seeing the very early start of a slow down in the recent up trend. Looking at the AMEX Gold BUGS Index chart one can see the momentum weakening on the latest run up to new highs. The momentum stayed below its previous high and is showing weakness although at 60% it is still a positive strength.

As for the Index trend, well that has been quite positive since the May bottom with one period where the Index moved below the intermediate term moving average line with the line turning negative for a week or so, however, momentum stayed in the positive zone to negate these negatives. Despite the gold move this Index has not made new highs during the week. It is very often the case that the stocks LEAD the action of gold, so, this may be a pre-courser to a top of some sort in the Index and in gold. However, let's not get ahead of ourselves and let the top occur and confirm before jumping the gun. That way you will not get out at the very top but also most likely will not be left holding cash if the trend continues and zooms into the stratosphere.

SO, WHAT'S DRIVING THIS MARKET?

Is it the events in the Middle East, in Africa or is it because of the U.S. $ weakness? Hell, if I knew I would not be asking the question.

That's one of the beauties of being a pure market technician. You let professionals much smarter than yourself do the real thinking and acting, all you need to do is understand what their market actions are telling you and follow the consensus of all those professionals. Consensus of professionals may not always be accurate but I'll take that rather than trying to guess without them.

WHICH GOLD STOCKS ARE BEST?

Ah! You're probably ahead of me. This is a trick question. Best for WHO? Those with weak hearts and a low tolerance for pain would probably say the highest "quality" stocks. Those with a devil may care attitude would probably say the out and out gambles. Most are somewhere in between. And some wouldn't touch gold stocks but stick to the metal itself. And then there are those holier than thou commentators, such as one I was listening to on the radio the other day, who thought anything that has to do with gold is a nutty proposition and only for fools. That's the beauty of the precious metals, something for everyone and nothing for the rest.

To understand what your type of gold stocks are doing (they all do not move in unison) I suggest you get used to the various Merv's gold Indices published with these commentaries (or for subscribers, as a separate technical page) and try to understand which category is moving and which is not. As an example, the latest information shows that the gambling and speculative stocks are still moving while the "quality" are falling behind. One would therefore be cautious about investing in the "quality" stocks right now but still look at the speculative. There are times when the trend in categories is the other way around.

MERV'S PRECIOUS METALS INDICES

A great week for gold and silver but the various Merv's Indices were all over the place from a gain of 8.1% for the Spec-Silver Index to a loss of 1.2% for the Qual-Silver Index. The seven Merv's Indices have been basically holding down the top seven spots in the various time period performances. However, lately a few of the Indices have been falling behind and been taken over by silver and the AMEX Gold BUGS Index performance. Is this trend to continue? Probably not for long unless the market turns down. The Merv's Indices just may out perform on the down side but we'll have to wait and see. For now all of the Merv's Indices and the four major North American Indices are still technically rated as POS (BULLISH) for all three investment time periods, except for Merv's Qual-Silver Index which has dropped to a +N rating for the short term.

MERV'S GOLD & SILVER 160 INDEX

There are SO MANY precious metal stocks out there vying for your investment dollar that it is getting more and more difficult to just limit the "universe" to 160 stocks. I'm toying with the idea of expanding the number but not immediately.

The universe was not such a great performer during the week, although better than the major North American Indices. With a gain on the week of 2.5% the average universe stock did slightly worse than gold itself. Hopefully this is a one week phenomena otherwise it has an ill portent for gold. There were 88 gainers on the week (55%) and 67 losers (42%). This is a significant weakening from last week. Looking at the intermediate term momentum indicator, it has been moving sideways since the beginning of the year and is sitting just above its up trend line from the May bottom. It wouldn't take much downside action to cause this indicator to move below its up trend line for a strong indication of a trend reversal. The overall technical ratings for this group of stocks also weakened slightly during the week but still BULLISH for all time periods.

There were only three stocks in the plus/minus over 30% weekly performance category during the week. This is a slight weakening from last week. Even the best performer during the week did not quite come up to the performance of last week's best. All in all, it looks like we might be heading towards some lateral or downside action ahead. The question is WHEN?

The best performing stock during the week was Quaterra Res. Inc. with a 46.9% advance during the week. Quaterra is no stranger to the over 30% weekly performance category and was shown here in our 17 March 2006 commentary when it made a weekly gain of 36%. Quaterra last turned to the POS side in my technical tables on 18 Nov 2005 at $0.43 and is now up 447% since turning POS 4½ months ago. See chart on next page.

MERV'S QUAL-GOLD INDEX

The highest "quality" precious metal stocks are not having a good week, despite the performance of the metals. This Index gained only 1.0% on the week. With 19 gainers (63%) and 11 losers (37%) this is a substantial weakening in the breadth of the group versus last week. The short and intermediate term ratings also weakened but the long term rating did improve by 2%. This Qual-Gold group is rapidly losing its performance and is now number 15 out of 23 in the short term. The short term ratings are the most volatile and could turn week to week but for now the weakness is showing.

MERV'S SPEC-GOLD INDEX

At a gain of 1.5% on the week the Spec-Gold Index did better than the Qual-Gold Index did but not as good as the overall universe. As we go lower in stock "quality" it seems we go up in performance. This is the usual situation during a roaring bull market in gold stocks. Investors (speculators) gravitate towards the more speculative stocks at such time. Despite the better Index performance the breadth was lousy. 15 winners and 15 losers for a 50% both ways. This is a serious drop from a 90% bullish gain last week. As for overall group ratings, the short term rating dropped slightly while, surprise, the intermediate and long term ratings improved slightly. There is always a surprise in these numbers.

MERV'S GAMB-GOLD INDEX

Of the gold based Indices the Gamb-Gold Index continues to out perform the others. Now rated as the best performing Index for the short term and number 2 for the other time periods, this is where the action continues to be. Since the bottom in May this Index has climbed some 216%. Not bad for an average of 30 stocks. Although the Index gained 4.4% on the week the breadth was not all that great with 16 gainers (53%) and 13 losers (43%). As could be expected, the BULL ratings for the group declined a few points during the week.

Quaterra Res. Inc. mentioned on the previous page is also a component stock of the Gamb-Gold Index (and the Spec-Silver Index). The chart is shown here with an arrow indicating when the technical rating turned POS (BULLISH).

SILVER

Silver is trying to get back on track after it's sell off a week ago. This week the activity was mostly to the up side. Silver remains above its intermediate term moving average line and momentum is still positive, although it took a licking the previous week. All is still well with the metal.

MERV'S QUAL-SILVER INDEX

Despite silver putting in a good performance this past week the "quality" silver Index did not do so well. It was the only Index with a negative weekly performance losing 1.2% on the week. The loss was not the result of one or two real bad stocks but a general negative performance for the majority of component stocks. 40% of the stocks advanced while 60% declined. Although near the very top in the performance ratings for the intermediate and long term we see that the short term performance is really slipping with the Index now at number 22 out of 23. Only the U.S. Dollar is performing worse.
MERV'S SPEC-SILVER INDEX

Where the Qual-Silver Index had the worst weekly performance of the Merv's Indices this past week the Merv's Spec-Silver Index had the best performance with a weekly gain of 8.1%. All three of this week's over 30% performing stocks were in this Index, which suggests the reason for the Index performance. On the group breadth level the weekly gain had little effect with only 60% gainers and 32% losers. The overall group BULL/BEAR ratings were all over the place with the short term improving a little, the intermediate term losing a little and the long term remaining the same. This Index is up 320% since the May bottom, a great performance as an average of 25 stocks.

MERV'S GOLD INDICES TABLE

Click to open larger image in new window.

Well, that's 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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