Technically Precious with Merv
The radio and TV commentators are saying the commodity bear, short as it was, IS OVER. But what do the charts tell us? They are the actions of money talking. Let's see if we can understand their latest message.
First we look in on the long term P&F chart to see if there has been any further damage to the long term gold position, NOPE. Well no damage but some additional action taking us closer to a potential reversal signal. With reference to the P&F chart shown last week we had a rally and another reaction during the week. What this did was provide a level that would cause the first of my requirements to be activated, that is a move below two previous lows. Those lows were set during the week at the $640 level with a move by gold to $630 breaking below such double lows. However, for a reversal signal, to the long term bear, we would also need to move below the up trend line. Again, as shown last week, we have two up trend lines, a primary one going back to the start of the bull market in 2001 and a secondary one from the latest burst of activity which started in July of last year. The primary up trend line would be crossed, if no other volatility is introduced, at the $610 level while the secondary line would be crossed at around the $590/$580 level. Other than that, the bull is still in control.
In the past I had mentioned the similarity between this bull market and the one during 1976 through 1980 (see my commentary for week ending 12 May 2006). The biggest difference has been in the strength of the bull market price action. Using the long term RSI as a momentum (strength) indicator the previous period spent much more time above the 70% level and the 80% level. This bull has spent very little time above the 70% level so far and none in the 80% level. Despite the volatility and appearance of great strength, it has not yet reached the 1979 level. Is this important? Who knows? It is interesting information that might tell us something as further action develops. No two periods act exactly the same but these two bull periods are about as close as they can get.
Looking at our normal indicators and market action, from the long term perspective, we still have gold activity well above its long term moving average line with the line slope still pointing aggressively higher. Long term momentum is very positive although coming down a notch recently. The indicator overbought level is the 70% level. Gold was inside its overbought zone but is once more below it. How much lower this indicator goes and how long before it is back above the overbought line will depend upon whether we are now in a new up trend or just in a short rally within a more concerted weakness. I don't see a new bear market but we could still have a prolonged lateral trend with gold possibly holding above the $620 level. The long term volume indicator is still in a positive mode and is comfortably above its long term moving average line. All seems well from the long term perspective.
From the above I must remain BULLISH on the long term.
The May reaction may not be over. It's one of the sharper corrections but not among the most severe. If I was to guess I can see the price of gold somewhat stabilizing and possibly moving a little lower. The $620 level sounds like a good level to end at. However, there may be several weeks of sideways motion before the speculative juices start to flow again. In the mean time what we do here is check out the market action and take things one week at a time. No use to jump the gun and spend our capital only to have it sitting doing nothing, or worst going lower. I like to wait for a move to start and get on early thereby eliminating much of the risk in trying to pick the bottom or guess ahead of time.
The intermediate term indicators are still all positive. From that stand point we had not gotten into any intermediate term bear market yet. The price action is sitting on top of the intermediate term moving average line but still staying slightly above. The line itself is still pointing upwards, which kept the trend bullish on several occasions in the past. As for the price momentum, it is still inside the positive zone above the neutral 50% line. It is coming down fast but I expect that the slide will level off before going negative. The volume indicator has reacted lower from its top, along with the price action. However, it is still above a positive intermediate term moving average line and rated positive.
All in all, still BULLISH on the intermediate term (although neutral might be more appropriate).
It's only when we get into the short term that we start to get a bearish picture. The price is below a negative sloping short term moving average line (8 DMAw). Momentum (13 Day RSI) is in the negative zone although there is a slight strengthening shown that might, with another day of upside action, take the momentum back into the positive. For the past few days the daily action could not make a new low and has established a short term support at the $636.8 level. We can see the price action remaining within a downward sloping channel although at this stage the channel trend lines are not that precisely defined. Along with the support, gold has also established a short term resistance level at $675 but that level is still somewhat fluid. All in all, the short term must still be considered to be moving lower, at least until the upper resistance level is breached.
This is always the real tricky time period to call. However, a technician maintains the trend in force until such trend has been reversed. At the present time, on the very short term basis, the trend has not yet been reversed and must still be considered as moving lower. The price is still below the very short term moving average line and the line is still pointing lower. The reverse was true for most of the trek from the $560 level to the $700 level. So, one is better off to wait for the breach and moving average turn rather than to guess. The aggressive Stochastic Oscillator is also continuing in its downward trek and has entered its oversold zone. It does not yet show signs of reversing although it is now very close to its moving average trigger line. From this one must assume the trend to continue lower but realizing that a move to the $675 resistance would change that.
NORTH AMERICAN GOLD INDICES
Despite a negative weekly closing for gold the North American Gold Indices all closed on the up side with gains between 1.8% and 2.6%. The "quality" PHLX Gold/Silver Sector Index being on the low end while the more aggressive AMEX Gold Miners Index being at the upper level. This did not much change the picture as to the RATE(ings) of the Indices for the three time periods. For the short and intermediate term the ratings are still bearish (NEG) for the major Indices while for the long term the RATE(ings) Improved slightly for the two AMEX Indices and they are now back to bullish (POS).
The PHLX Gold/Silver Sector Index is shown above and like gold it too has somewhat established an upper and lower barrier which would define the next move once one or the other is breached. On the short term we have the Index still below a negatively sloping moving average line, which is a bummer until changed. However, on the more immediate term we have an aggressive Stochastic Oscillator (SO) which is inside the oversold zone but appears to be ready to move above the oversold line. It is already above its trigger line. Again, as with gold we'll just have to wait and see which gets broken first, the resistance (red) or the support (blue).
MERV'S PRECIOUS METALS INDICES
Where the major North American Indices tell you how the largest few companies in their Index are doing Merv's Indices tell you what the AVERAGE performance is of all Index component companies in each Index. Better yet one can determine which sector of the gold stocks are moving and which sector may not be. Merv's Indices provide performances for the quality stocks, the secondary or second tier stocks and for the gambling variety of stocks. One can then determine in which category one is most likely to profit and which is the more risky.
This week all Indices gained but the more aggressive gained more while the higher quality gained the least. Despite the general gains the overall RATE(ings) of the Indices did not change much. All Indices are NEG (or bearish) on the short and intermediate term while on the long term most are still POS (or bullish). A surprise because of the general advance on the week was the Gamb-Gold Index which saw its intermediate term rating move from a -N rating last week to a full NEG rating this week. On the positive side the previous long term NEG rating for the Qual-Silver Index has improved a little to the +N level. all in all, little movement.
Price Rate of Change (ROC)
Shown this week with the various Merv's Gold Indices tables (found in the subscriber's section of Merv's Precious Metals Central) is the Price Rate of Change (ROC) indicator. It basically tells us, in percentage terms, how much the Index has advanced or declined over a specific period. A 13 week period was used this week to represent performance over an intermediate term time period. This indicator is interesting in that it provides us with a representation if the performance is improving or decreasing as we move forward. A decreasing performance, as in a decreasing momentum, suggests a possible trend reversal ahead. As one can see from these various Indices, that performance has been decreasing since about the start of this year. The other important feature of this indicator is the neutral line. Should the indicator drop into the negative zone, indicating a negative performance for the period, one should be on guard.
MERV'S GOLD & SILVER 160 INDEX
The overall universe of 160 precious metal stocks gained an average of 4.5% on the week. This is double the gains shown by the various major North American Indices. Despite the good gains and a loop sided 72% gainers to 27% losers on the week, the various ratings did not move noticeably. We are still bearish in the intermediate term with a 71% bear rating and still bullish in the long term with a 61% bull rating.
Since moving into the positive zone in early July the ROC indicator has remained positive since. However, one can see the continuing weakness in weekly performance in this indicator since the beginning of the year. It has been moving in a very tight downward sloping channel for four months but broke out on the down side with the market a week ago. It is still positive but a lot of damage has been done to it so we'll have to keep an eye on it to see if it will go negative anytime soon.
This week we had only two stocks in my arbitrary plus/minus over 30% weekly performance category. Both are on the plus side and are coming off a previous week of plunge prices. The best performer was Aurizon Mines with a 41.3% gain. This was due to a takeover announcement from Northgate Minerals at $3.00 after the close the previous Friday. Following that Friday's action Aurizon turned NEG in the tables, however the first price at which investors could have sold was the next opening price at $2.96. This would have given a technical investor a profit of 97% over a 6 month period with a buy when the stock first turned POS in early Dec at $1.50.
MERV'S QUAL-GOLD INDEX
The Qual-Gold Index gained 2.5% on the week, just a little bit better then the average major Index. The gain was still small when compared to the previous week's drop. With 77% of the component stocks as gainers on the week and 23% as losers the ratings still barely moved. We are still bearish intermediate term with an 80% bear rating and still neutral in the long term with less than 50% in either the bear or bull direction.
The ROC indicator is just very, very slightly positive for a very weak reading as far as the positive is concerned. The intermediate term performance is therefore neutral. We see the same weakening in the indicator ever since the beginning of the year only more pronounced than in the 160 Index.
The intermediate term moving average turned down last week and remains so while momentum is bouncing off its neutral line. On the long term the moving average is still positive with the price still above the average. Momentum on the long term is positive although showing weakness.
MERV'S SPEC-GOLD INDEX
The second tier of gold stocks did little better than the quality stocks with an advance of 2.8% on the week. 70% of the stocks advanced while 27% declined. As with the other Indices the overall ratings changed very little over the week. We are still intermediate term bearish with a bear rating of 68% while we are still bullish in the long term with a bull rating of 63%.
As with the 160 Index, the ROC indicator had been in a very tight slightly downward sloping channel all this year but finally broke on the down side last week. It remains weak but still in its positive zone. We still have a positive long term moving average condition and a negative intermediate term one. In both cases the momentum indicators are still positive but showing significant weakness.
MERV'S GAMB-GOLD INDEX
With a weekly gain of 6.1% this past week the gambling stocks has been the place to be since the group really took off last May. Even after the plunge of a week ago this Index is still ahead 179% over the past year and ahead 96% since the end of last year. It's difficult for any other Index to beat that performance (except the Merv's Uranium Index but that's another story). 73% of the component stocks advanced during the week and 27% declined. The ratings did change more in this Index than in the others but still remained bearish in the intermediate term with a bear 68% rating and bullish in the long term with a bull 70% rating.
Unlike the previous ROC action, the ROC here has not been weakening since the beginning of the year but did start showing weakness only very recently. It is still above its support level from action in Feb. As for the moving average information, although the Index is below its intermediate term moving average line the line slope is pointing upwards. The long term average is still far below the action and still very positive. Both momentum indicators are still positive, showing some weakness but still comfortably above their respective neutral lines
Silver has had quite the ride for the past several months but that seems to have come to an end, if only for a short spell. The present action suggests the development of a serious head and shoulder pattern with the "neckline" as indicated by the blue support line. The H&S pattern is being confirmed by the actions of the momentum indicator (50 Day RSI). Momentum has seriously deteriorated at the time when silver was making new highs. This is typical in H&S patterns. These patterns DO NOT always turn the market lower but one should not ignore them.
For now the intermediate term moving average has turned almost to a horizontal trend but not yet downward. Long term there is a lot of maneuvering room. The volume action is still positive from an intermediate term perspective with the volume indicator still above its positive sloping moving average line but things could change here quickly. For now the most important level to watch is the $12.00 level for a breach of the support line.
MERV'S QUAL-SILVER INDEX
The weakest Index of the seven Merv's Indices is the Merv's Qual-Silver Index. Despite what still looks like a positive silver action, the Qual-Silver Index is most definitely not acting well. It went fully NEG (bearish) for all three time periods after the plunge a week ago although the long term has turned back to the +N level this week. The weekly Index action has been toying with its long term moving average line, closing below last week and above this week. The line slope remains positive so the back and forth movement has no real effect yet. On the intermediate term the moving average line had turned down a couple of weeks ago and remains so.
Last week I showed the intermediate term momentum indicator going into the negative zone. This week we see the ROC indicator doing the same thing, the only Index where the ROC has done this so far.
At the present time this is not the place to be considering investing hard earned capital unless one is a real long shot gambler wanting to take the huge present risk of possibly catching a bottom. For my thinking, it's not worth the risk at present.
MERV'S SPEC-SILVER INDEX
The best performer with a 6.8% gain on the week the Spec-Silver Index still has a long way to go to make up for the plunge of the previous week. With 76% of the component stocks advancing and only 20% declining the ratings moved but only slightly. The intermediate term rating improved slightly to a bearish 74% while the long term rating continued to decline to a still bullish 62%.
The intermediate term ROC indicator was interesting here in that it remained constant most of the year but broke below a support level right at the top a few weeks back. The indicator is still in its positive zone but pointing lower. With a negatively sloping intermediate term moving average line one would need to be a big risk taker to place any new money into these stocks. For lower risk one should wait for the indicators and price action to be in the positive direction.
MERV'S GOLD & SILVER INDICES TABLE
That's it for this week.