Technically Precious with Merv

By: Merv Burak | Mon, Jun 12, 2006
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Boy! Another week or two like the last one and a guy could get discouraged. BUT after every decline there is a silver lining somewhere ahead. Sit on your cash, ride out the storm and get in when the bull continues again.

It was torture preparing my various weekly Global Indices tables (the comparative Indices tables can be seen at www.themarkettraders.com). Major American Indices down between 3 and 5%, Toronto Composite down 4.3%, the Venture down 7.1%, Shanghai Composite down 7.1%, Taiwan Weighted down 7.4%, India BSE down 6.1%, Nikkei 225 down 6.6%, French CAC 40 down 3.9%, Finland General down 5.3%, and on and on and on. Of the 79 major North American, AustralAsia and European market Indices that I track each week (not including the separate Industries Indices) not a single plus can be found this past week. Add to that was the performance of the 20 Gold & Silver Indices that I track (see below), none had a positive week. To end the disaster, of the 27 Non-Edible Futures that I track (see the table at www.themarkettraders.com) three were positive on the week, the rest were negative. Copper dropped 8.9%, silver dropped 7.2%, Platinum dropped 9.2% while gold dropped 4.4%. The gainers were the US $ Index, Heating Oil and 30-Year Treasury Bonds. Let's just forget this past week and move on.

GOLD

LONG TERM

That's what the P&F chart looks like when we change to $15 units and still maintaining a 2 unit reversal. One might still say that for a long term chart the P&F action is still too volatile with these parameters. Maybe a $20 or $25 units will be better but let's see where this gets us. No one ever said that technical analysis was a precise science. So, what does this chart tell us? We are still in a bull market but getting precarious again. A move to $585 would make this chart go bearish. Where the previous P&F chart (the $10 unit one) has already broken on the down side for a bear market with a $490 projection, this new chart still has a little more to go before it goes bearish. If it does go bearish it too would project to the $490 area. Although the P&F chart is a major consideration of mine as to going bullish or bearish in the end I do combine its message with that of the normal indicators and make a judgment decision as to where we are in the overall trend.

Looking at the various trend, momentum and volume indicators one does not yet get as bearish of a message as the P&F chart gives us. To start, the price of gold is still a comfortable distance above its positively sloping moving average line. However, one cannot miss the fact that the price is heading lower at a good clip and with action like this past week it could cross the moving average line in the space of a week or two. As for the long term strength of the existing bull, based upon a daily chart the momentum is also comfortably above its neutral line but heading lower rapidly. It too could cross its neutral line in a couple of weeks at the latest speed. As for the volume indicator, this is usually a lagging indicator at market tops so one could expect it to still be positive, which it is.

Based upon all the long term technical information I must still remain on the BULLISH side although it might be more prudent to go neutral. I'll see how things develop over the next week.

INTERMEDIATE TERM

The updated intermediate term P&F chart for gold is now a $5 unit and 3 unit reversal chart. Although this chart has broken below several previous lows it has still not broken below its up trend line. I guess one can classify it as a neutral chart but still in the positive zone. More interesting is the candlestick chart.

What we see on this chart is a price trend that has broken below its intermediate term moving average line and only in the past few days the moving average line has turned down. The price momentum indicator has taken a sharp dive over the past month and is now just a hair above its neutral line. Any negative day on Monday or Tuesday will drop this indicator into the negative zone. Unlike these two indicators, the volume indicator is still showing strength by staying above its low from a few weeks ago and remaining above its intermediate term trigger line. The combination of the negative moving average information and the trend of the momentum indicator has caused the table rating for gold to be NEG or bearish. I should also go bearish but I'll wait another day or two and see how that momentum indicator acts over that period.

For now, based upon the intermediate term indicators I have gone to a MINUS NEUTRAL position. Next week should see a definite change one way or the other.

SHORT TERM

The short term is easy to read this week. The trend continues towards lower levels with the price below its negatively sloping moving average line (15 DMAw) and remaining within that downward sloping channel. Momentum, after a few days of trying to strengthen, is once more heading for lower levels but not yet into its oversold zone (13 Day RSI). Remaining with the trend I must assume that the price will move to still lower levels over the next week or so.

IMMEDIATE TERM

This one is also easy. Remaining with a trend in motion one must assume that the next day or two will continue the downward drift. Until the price closes above its very short term moving average line (8 DMAw) and the line itself turns up there is no other position to take. The Stochastic Oscillator often gives us a warning of a turn around but is not doing it at this time. It too is heading lower inside its oversold zone but with no sign that it wants to break above the oversold line. Continue to look for lower levels.

By sticking with the trend in motion one would have been in during the climb from mid to late March until the top in mid-May. You will always be wrong at the very top or bottom but will reverse very close there after. This is a very simple technique that does not require any expensive software or sophisticated programs. Yes, there will be whip-saws where you might come off with a small loss at times but that is the name of the game, take very small losses and large profits.

For those of you who are not familiar with the weighted method of calculating a moving average (it is not the exponential method so don't get confused) you can substitute simple moving averages in place of the above two weighted ones. A simple 5 DMA is a good replacement for the 8 DMAw and a simple 10 DMA is a reasonable replacement for the 15 DMAw. In any case, never expect perfection, errors or whip-saws WILL ALWAYS occur when you are not paying attention.

NORTH AMERICAN GOLD INDICES

All of the major North American gold Indices closed lower during the past week. In fact they all lost in the double digit with an average loss of about 10.8%. The PHLX Gold/Silver Sector Index (XAU) lost about the average at 10.6%. So, what does it look like from here? The chart above shows an Index which has taken a sharp slide and has come to a critical support level. It must hold above the 120 level or much lower levels are still ahead. The serious weakening of the Index could be seen from the momentum indicator, which had a significantly lower high at the time of the latest new high in the Index. This kind of negative divergence very often leads to a turn around in the stock or Index. As we can now see, the momentum has entered into its negative zone for a bearish message. This intermediate term momentum is accompanied by a moving average line that has turned down following a downside break from the Index. The intermediate term is bearish here. The long term is still okay but in a very precarious position. The Index is already below its moving average line with the line turning but not yet turned into the downward direction. A little more action below the line could turn it all the way.

My best guess is that this Index still has more down side to go although it could take a breather and move sideways for a few days before continuing lower.

Most of the other major Indices are in the same situation as the XAU described above.

MERV'S PRECIOUS METALS INDICES

Disaster. This was a week one wants to forget, although it wasn't as bad as the one a few weeks ago. Although the Merv's Indices had a slightly better week than the major North American Indices it was still not something to be bragging about. At an average loss of 9.0% we can't stand this for too long without getting a little annoyed. Why, why, why we ask? Who is pushing gold lower and lower? Although I could see this down turn coming, almost any technician could, it still hurts when it happens. Oh well, let's get on with it.

This is actually a great opportunity. As most of you should be now sitting with cash in the bank what you are waiting for is the bottom and to get in on new bargains. I suspect there will still be lower prices ahead but let's let the daily or weekly market action actually tell us that. It is always murder to go against the message of the market so let's wait for it.

MERV'S GOLD & SILVER 160 INDEX

The overall universe of 160 precious metal stocks took a dive during the week and ended down 8.3%. Not good but a little better than the majors. Still, the universe is bearish on the intermediate term with the Index below its negatively sloping moving average line and its price momentum pointing almost straight down but still just a wee bit above the neutral line. On the long term the Index is still above its positively sloping moving average line and momentum, although weakening fast, is still comfortably above its neutral line. Since the trend of both the Index and its momentum are heading lower (although still positive) the implications are not too good and the table ratings has this Index as +N on the long term. I guess that's about as good as I would put it, not fully bullish but not yet into the bearish camp.

As for the breath of the universe action, we saw a slaughter this week with only 7.5% of the stocks advancing and a full 91.3% declining. As for the overall ratings themselves, as one can expect they are all in the NEG or bearish camp. On the intermediate term the BEAR rating is at 90% (70% last week) and the long term is at 52% (57% BULL last week). Short term we are at a BEAR rating of 90% (66% last week). Although the short and intermediate term ratings do not have much further negative to go the long term does. One might still expect more downside action in weeks ahead with the long term ratings going deeper into the negative.

There were no stocks in my plus/minus over 30% weekly movers category this past week. The closest that any stock came to such performance was my sentimental gambling favorite, Thyee Development Corp. with a 25.9% gain on the week.

MERV'S QUAL-GOLD INDEX

The 30 largest stocks in North America faired a little worse than the overall universe with an average drop on the week of 9.9%, almost at the level of the major Indices. Looking at the Index indicators both the intermediate and long term moving averages have now turned down following the Index break on the down side. Long term momentum, although pointing almost straight down, is still inside its positive zone. One or two negatives weeks and we should see it below the neutral line. The intermediate term momentum is already there. Both periods are now rated as NEG or bearish in the tables of Technical Information and Ratings. I would classify them likewise from the charts.

This week's breath action is no help. All of the 30 stocks closed on the down side for a 100% bummer. This had the effect of moving the short term overall rating to the BEAR 100% level (63% last week). As for the intermediate term, that's at a BEAR rating of 98% (65% last week). The long term rating is at a BEAR 77% (50% BULL last week).

There are going to be great bargains in this "quality" group ahead but the picture does not say that it is time to get back in yet. Wait for the turn to reduce risk and avoid further potential losses.

MERV'S SPEC-GOLD INDEX

This was the best performer on the week in both the Merv's Indices and the majors. The Spec-Gold Index lost only 7.6% on the week. In normal times that might be viewed as a disaster but with the action of last week one might almost look at it as a real winner. Unfortunately, the Index is well below its negatively sloping intermediate term moving average line and the intermediate term momentum is well entrenched in the negative zone. The rating here is a definite NEG or bearish. On the long term things are not quite as dark. The Index is still above its positively sloping moving average line and the momentum is still in its positive zone. However, both are heading lower fast so the overall Index rating is not all out bullish but a +N for the long term.

Breath wise, we had 10% of the stocks closing higher and 90% closing lower on the week. Not a ratio one likes to see but if one is holding cash, it's the direction of preference so that better bargains can be had ahead. As far as the overall ratings are concerned, the intermediate term is at a BEAR rating of 88% (65% last week) while the long term has a NEUTRAL rating with neither a bear or bull above the 50% mark (last week it was a BULL 62%). On the short term the rating stands at a BEAR 90% (last week it was 73%).

As far as the speculative stocks are concerned, one should still wait for better market action before committing new funds into this group. There are individual stocks that might look okay right now but why take the added risk for a few % points extra potential gain?

MERV'S GAMB-GOLD INDEX

The gambling variety of stocks declined on an average of 9.3% during the week. For a miserable week such as this past one, one would have expected the gambling stocks to take a real tumble relative to the "quality" but they did even slightly better than the quality. Whenever I look at the performance differences between the "quality" stocks and the gambling stocks I always am shocked at the huge advantage one has by going into the gambling variety. Sure, on the occasion a gambling stock may take a very sharp drop but these are rare and most of the time you are out of the stock long BEFORE the drop. Gamblers understand, or should, that they get in on the move and GET OUT when the move is over. The "quality" investor usually holds on for dear life during a down turn wondering what the heck is happening and praying for a turn around. The gambler is just sitting back, relaxing in the Bahamas and not worrying.

On the week a full 97% of the gambling stocks declined while only 3% (that's only one stock) advanced. The advancing stock is my sentimental favorite gambling stock, Tyhee Development, because of my working underground in their gold mine oh so many years ago. Many fond memories. For you curling enthusiasts, we had RUM Bonspiels in those day. You know the kind, throw a rock, drink a shot of rum, throw another rock and drink another shot of rum. By the end of the game you are throwing the bottles down the ice instead of the rock. Of course this never happened because the mine officials (if there are any still living) will claim that we were an alcohol free mine. But I digress.

As for the overall ratings this week, the intermediate term has gone to 92% BEAR rating (82% last week) while the long term is at a neutral rating with neither bull or bear ratings over the 50% mark (last week it was at a BULL rating of 67%). As can be expected the short term rating is at the disaster level of a BEAR 97% (73% last week). Despite the serious drop of the past few weeks this Index is still ahead 78% this year alone. By comparison the Qual-Gold Index is ahead by only 10% while the PHLX Gold/Silver Sector Index is back almost exactly where it was at the end of the last year. What's this about the benefits of investing in the "quality"?

SILVER

Check this P&F chart of the actions of silver. What is clearly shown here is a commodity on the downward trek. It has had a couple of bear breaks, one projecting to the $9.00 level while the latest break is projecting to the $4.00 level. Now, that last projection looks a little far fetched but the first one looks quite possible. Silver has just moved too far, too fast so a come down was to be expected. From all that I have read, and that is dangerous for a technician, silver is still destined, eventually, for much, much higher levels.

MERV'S QUAL-SILVER INDEX

I guess one can call this the real bummer of an Index. It is rated at the bottom of my Gold Indices for both the short and intermediate term. About the only reason it is not rated at the bottom for the long term is its previous great performance. It is still riding the wave of the past. All of the technical information is negative this week, negative moving averages, negative momentum, just all negative. As for the breath, 100% of the stocks closed on the down side. Ratings for the short and intermediate term are at the 100% BEAR level (last week short term was BEAR 60% while the intermediate term was at a BEAR 90%). Long term the BEAR is at 80% (last week it was 50%).

As with the Qual-Gold group, this is not yet a place to be making new commitments, at least not yet.

MERV'S SPEC-SILVER INDEX

From the best of the bunch to the worst of the bunch in only a few weeks. Well, not the worst but close. Down 10.8% on the week it was the worst of the Merv's Indices and tied with the worst of the majors. As for the trend, it is now all negative on the intermediate term but still all positive on the long term. As with most Indices, the Index and its momentum indicator are heading lower real fast but for the long term they are still above their respective moving average or neutral lines. Another week or two and the long term might also go negative.

This Index had the best percentage of gainers on the week with a whopping 12% on the up side. Of course that means that 88% were on the down side. The overall ratings are quite bearish on the short and intermediate term but still neutral on the long term. Another week and the long term will go bearish.

MERV'S PRECIOUS METALS INDICES TABLE


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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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