Technically Precious with Merv
Some charts are starting to look very weak suggesting a serious correction but I'm not convinced that the bull is over. Let's take a look.
The one long term chart that has kept me bullish since the gold bull started has been my long term P&F chart. Even during the very hair raising days of April and May 2004, when gold broke below its long term moving average line and the line itself turned down. The long term momentum broke below its neutral line for a few days and the technical tables of information and ratings turned NEG. Even through all that the P&F chart stayed positive although it did give us a scare by almost issuing a reversal signal. Now, we are once more in the scare period. The P&F has broken below two previous lows (the first time it has done this since the bull started) and below its primary up trend line (ouch). This would have screamed "bear market" if it wasn't for two additional things. First is that secondary up trend line from the start of this latest sharp move in 2005. That trend line has still not been breached. The other major consideration is my normal indicators. They are still far from a bear signal and that causes me to look more critically on the P&F chart.
One problem that a technician must address when using P&F charts is that combination of units and reversals. As a price moves away some distance from its starting point the original units and reversal criteria become less meaningful. On the gold chart a 2 unit reversal with $10 units represents a $20 move for a direction change in plot. That $20 change would represent a move of 7% when gold was at $300 but now represents a move of only 3% with gold at $650. The chart therefore becomes more volatile as the price rises simply because the units used represent a smaller and smaller percentage of the current price. There are various ways of getting around this problem, some quaint, some elaborate and others simple. I always go for the simple. A change to $15 units and maintaining the 2 unit reversal would then give us a chart that may be more in keeping with the bar or candlestick chart indicators. Depending upon the week's action I'll probably have this as a new chart next week.
As for the normal indicators, the chart in the intermediate term section shows a long term moving average line and a long term RSI. This RSI is based upon daily data rather than weekly data and does therefore differ slightly from my weekly RSI but both are okay. What we have is a positive moving average line that is still some distance away from the price action. No cause for alarm from this indicator. The long term momentum indicator, based upon daily data, does not have the volatility that a chart based upon weekly data does. Check the RSI in last week's commentary and compare it to this week's. Despite the difference in volatility they both provide similar information. The momentum is still positive although coming down from lofty levels. The trend line drawn from the year ago start of move shows the same thing on both charts, a break below the line but by just a very minor amount. From these indicators we could still see more down side action without compromising the bull.
On the whole I am still BULLISH based upon long term indicators.
The intermediate term P&F chart is even more volatile than the long term. Adjusting for the change in price levels I do have a reasonable P&F chart for the intermediate term that provides a price projection to the $610 level. However, on its way there it could trigger a second projection to the $550 level which would then trigger all sorts of intermediate and long term projections, including a long term bear. So, let's hope it never gets to the $550 level.
The Friday close has placed gold just below its intermediate term moving average line, however, the line is still sloping upwards, but not by much. Momentum has been moving lower at a steady clip and is now very close to its neutral line, but still in the positive zone. Since the start of this latest bull move last July the momentum indicator has been at this low level three times before so it is no stranger to the neutral line. Our hope is that the result this time will be the same as before, a new move to higher prices, but at some point it will be different. Despite the drop in price recently the volume indicator remains quite positive. Although this indicator is very often a lagging indicator at market tops it is encouraging never the less. Although all the indicators are still positive they are very weak so I will go NEUTRAL this week and see what transpires next week.
The short term picture has not changed much in a few weeks. The basic trend is still towards lower prices and despite a small rise on Friday, the trend continues. The price is below its negative moving average line (15 DMAw) and inside a downward sloping channel. Momentum (13 Week RSI) is still below its neutral line in the negative zone although there are signs of some strengthening and a possible move back towards the neutral line. Until such time as the price action breaks out of the channel on the up side AND above a positively sloping moving average line, the downward trend is assumed to be continuing.
This is where one puts on his thinking cap and tries to come up with an educated guess as to what will happen in the next day or two. We have a price action that is still below its negatively sloping very short term moving average line and an aggressive stochastic Oscillator that is still negative but inside its oversold line. Volume action on the two down days of Wednesday and Thursday was extremely light relative to recent volume action. This might suggest that the selling pressure is subsiding and the price may be preparing for a new advance. This, however, is just a guess looking forward. It may be a good one or a bad one, we'll know in the next few days. Although a technician usually sticks with the trend in motion (which is still negative at this time) I am inclined to be a little more positive and am looking at an advance on Monday and maybe into the next few days. This, as a continuation of Friday's action.
NORTH AMERICAN GOLD INDICES
All major North American Gold (& Silver) Indices closed on the up side this past week but the results were quite varied. The AMEX Gold BUGS Index closed higher by 2.6% while the PHLX Gold/Silver Sector Index closed higher by only 0.7%. It's all in the weighting that each Index gives towards its various component stocks. Take the AMEX Gold Miners Index (chart shown this week). This Index has 43 component stocks and cheer leaders for this Index like to mention the diverse nature of the component stocks with everything from the high quality to some of the more speculative stocks included. However, with the weighting system used to calculate the Index value the more speculative stocks have basically NO EFFECT on the Index calculation. Although each stock represents 2.3% of the total number of stocks, one stock alone, Newmont Mining, represents 13.7% of the Index value. The largest 6 stocks represent 50% of the Index value while the bottom stock, Entrée Gold, represents LESS THAN 0.1% of the Index value. My question is always, why have these smaller, more speculative, stocks in the Index if they do not make any difference to the calculation of the Index value? They are there ONLY for their promotion value. Supporters can point and say, "look, the Index represents all categories of gold and silver stocks".
That is not to say that the Index is not a good gold Index. I like it and think that it is probably the best of the major North American Gold Indices but it does not really represent the more aggressive gold stocks. It represents the majors with a minor influence from the secondary stocks. Once one realizes that, it can then be a good Index. For those who are not into trading the actual gold stocks but still wish to participate in gold stock performance there is now a new AMEX traded Exchange Traded Fund (ETF) called the Market Vectors Gold Miners Index Fund, symbol GDX, which attempts to simulate the performance of this AMEX Gold Miners Index. It now joins the previous sole Index based ETF traded on the Toronto Exchange, the iShares S&P/TSX Capped Gold Index Fund, symbol T/XGD. Other gold Funds attempt to simulate the performance of gold, silver or a combination of the two. You can follow the performances and ratings of these various gold and/or silver based funds in the various tables (in the subscriber's section of Merv's Precious Metals Central). This new GDX stock is not yet listed until sufficient historical trading data is obtained but one can follow the fortunes of the Index as a substitute.
MERV'S PRECIOUS METALS INDICES
Now, you know what I'm going to say. Where the majors fail the Merv's Indices take over. The various Merv's Indices place EQUAL weight on all Index component stocks. No stock has a greater weight towards the Index calculation than any other. The overall universe of 160 stocks followed each week by Merv's Precious Metals Central are components of Merv's Gold and Silver 160 Index. Here you see what the gold stock universe is doing. One criticism of an equal weighting Index is that the smaller, lower priced stocks have a greater effect on an Index calculation due to the fact that percentage wise they have a far better performance. This is true BUT do you not want to know about this performance and not have it hidden just because the stock is a small stock? In anyway, I have solved that "problem" to some extent by the grouping of separate sector Indices.
The largest dollar priced stocks are usually the highest quality stocks. The 30 highest quality stocks therefore have their own Index, the Merv's Qual-Gold Index. No "penny" stocks here to interfere with the ‘quality" Index value calculation. This Index is most closely attuned to the performance of the major North American Indices.
Once you get away from the 30 largest gold companies the field starts to get quite mixed up between high and low priced stocks. The Merv's Spec-Gold Index covers this secondary tier of stocks with their mixture of prices.
As for the "pennies" they are included in a separate Index of their own so one can see the performance of these gambling variety of stocks without a dilution from the larger stocks. These then are components of the Merv's Gamb-Gold Index.
Lately silver has been moving to its own tune. There are two silver Indices developed to track the performance of silver related stocks.
The Merv's Qual-Silver Index tracks the performance of 10 of the largest silver related companies and is similar to the Qual-Gold Index.
The Merv's Spec-Silver Index tracks the performance of 25 additional silver stocks and represents both secondary and gambling variety of silver stocks.
The performances and technical ratings of these various gold and silver Indices (as well as others) are found in the Merv's Gold & Silver Indices Table (see below). The performances and technical ratings of the individual component stocks can be found in their individual Index Pages available in the subscriber's section of Merv's Precious Metals Central.
The various Merv's Indices had a positive week except for the most speculative Indices, the Gamb-Gold and Spec-Silver Indices. All others just squeaked by on the positive side. The weekly activity has been pretty minor (as compared to the much more active activity we are used to) and there were no performers in my arbitrary plus/minus 30% category, so I wouldn't go into the Index details this week. Besides I am running late so I will call it a week.
MERV'S GOLD & SILVER INDICES TABLE
That's it for this week.