Technically Precious with Merv

By: Merv Burak | Mon, Jun 19, 2006
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Ouch! That wasn't any better than the previous week. This is still a weak gold market. Let's see how weak.

GOLD

LONG TERM

I was planning to show the new $15 unit, 2 unit reversal long term P&F chart but if the gold price continues lower I may have to go back to the $10 unit chart. Anyway I thought I'd show this long term bar chart, or more correctly a Candlestick chart. But first, what does the P&F chart tell us at this time?

Well the new P&F has broken down for a bear signal with a price projection to the $480 level. You may recall that the previous $10 unit chart broke down earlier and projected to the $490 level so we have a relative confirmation of where we might expect the price to go. Always remember, price projections are only a guide and not a certainty. Always let the daily or weekly market action dictate where the price is going and if the action does not conform to the projection, the market action rules. The P&F chart is showing a support level at the $540 level and that is close from where we had a bounce this week. The bounce also started from the popular 200 DMA line. My weighted 200 DMAw line is a little more aggressive than the popular line, which is based upon a simple average calculation. I usually require my moving average to turn into the direction of the price trend before validating a reversal signal and that has not yet occurred, using daily data. So, for now the long term P&F chart, whichever one I am using, is bearish long term. This is only one of several indicators I use to make a final determination of rating but it is a very important indicator.

Checking out the long term chart (above) and indicators one quickly comes to the possibility that the previous upper (resistance) channel line may now be a support line. This is often the case but is not something that I would always count on with my investment capital. Anyway, the bounce previously mentioned also was off this trend line.

In addition, if one were to draw a trend line through the July/2005 and Nov lows, that trend line would also come just where the bounce started. So, we had a lot of indications that a bounce or short reversal was possible from all these trend lines and moving averages.

However, a bounce or even a short reversal does not change a long term trend. First to consider is if we are or are not in a long term bear trend or are we only in a severe reaction in a long term bull trend? Well, in addition to the P&F chart the above chart shows that the price has crossed below but closed right on the long term moving average line (my weighted line). The line, although in a turning mode, has not yet fully turned to the down side so there is still hope that the price can continue higher. As for the long term price momentum, as you can see it is aggressively moving lower but is still above its neutral (50%) level. Long term volume indicator is also still positive but as often mentioned, this is a lagging indicator at market tops. It would be important if it was leading the price action.

Putting it all together I should go bearish but I will wait for the momentum and moving average to confirm the change. So for now I have gone to the NEUTRAL rating.

INTERMEDIATE TERM

There are some interesting features in the intermediate term P&F chart (this is still the $5 unit, 2 unit reversal chart). Since the start of the new move last July this chart performed quite well under the circumstances. What circumstances you ask? Heck if I know but it was a good term to use instead of saying that the chart screwed up a couple of times. The chart acted quite on target until the reversal signal in Feb at $540. That break projected to the $475 level but as we see the action basically stalled at the break-out level and eventually continued on its bull way. The action since the end of March has been a wild ride up and down. The plotting went far away from the normal 45 degree up trend line. Very quickly we had a move below two previous lows as the first of two required events to indicate a trend reversal. However, the second event could not happen for over $60 additional points. Whenever we have the plotting action moving far away from the primary up trend line we sometimes move the line higher to the next consolidation level. This is now a secondary up trend line. We could do this twice and get a final line in concert with the initial break. Myself, I don't like this kind of manipulation because it works best only in hindsight, like right now. Anyway, that initial break gave us a projection to $650 which was not far from the break. Once that first down trend move reversed we then had the capability to do a vertical count and projection to the $570 level. The real reversal signal was when the action broke below the primary up trend line. This also gave us a projection to the $570 level but shortly thereafter an additional projection to $550. All of the intermediate term projections have already been met. Now what?

From an intermediate term perspective (we'll look at the short term later) there seems to be enough targets met that one would not be surprised if a rally of sorts should be in the cards. So far the bounce has not shown much enduring strength so we need some more upside activity (or lateral activity) to build strength for some further upside action. Sounds like a merry-go round or is that a Catch-22?

As for where we actually are, the price is now significantly below a negatively sloping moving average line and the momentum is inside its negative zone. Volume action is one saving indicator as it is showing that the plunge of the past month was not on any significant volume. Must be just a bunch of scarred speculators jumping the gun. However, I must put things together and come up with a rating for the intermediate term and I can only come up with a BEARISH rating at this time.

SHORT TERM

Well I must admit that so far the short (and immediate) term analysis of staying with the trend in motion has been working out very well, both now and in the previous up move. Somewhere down the line the trend will change but until it does I must stay with it. The short term continues to be weak with the price action continuing below a very negative moving average line (the 15 DMAw). Short term momentum is also still quite negative but on the other hand it was inside its oversold line and has now moved just above the line. This is often (but not always) an indication of a continuing rally ahead. The action also remains well entrenched within a better defined down trend channel. The short term continues to the down side but that does not preclude a day or two more on the up side but remaining below the moving average and still within the channel.

IMMEDIATE TERM

Although the price is still below its very short term moving average line and the Stochastic Oscillator is still in the negative zone, to try and assess what is expected to happen over the next day or two one looks at the position of the SO and the latest few days of trading. The SO, although in the negative zone, was in its oversold zone and has just moved above its oversold line for a possible indication of a continuing upside days ahead. The latest price action is showing an upward drift and one can in fact draw a very short term trend line (the blue dashed line). From this I can present an educated guess that the next few days may be on the up side as the bounce continues. As for the longevity, well that must wait until the move has broken above the channel and the moving averages have turned up. Should the daily action close below that very short dash line then the bear continues.

NORTH AMERICAN INDICES

To go along with the long term charts that I have presented in the various Merv's Gold Indices pages I show the long term chart of the AMEX Gold BUGS Index from the start of the gold bull market. This is the most aggressive of the major North American Indices (although the relatively newer Miners Index may take its place eventually). When comparing its performance one should probably compare it to the Merv's Spec-Gold Index although its performance is closer to that of the Merv's Qual-Gold Index. From the bottom in 2000 to the Friday's close the BUGS has gained a little over 700%. That's about an average yearly performance of around 43% per year. Not bad but could be a lot better (see the commentary for the Merv's Indices). At Friday's close the BUGS (or more commonly called the HUI) is still ahead 6% from last years close.

Although the RATE(ing) in the table of technical information shows that the Index is NEG (or BEARISH) for the intermediate and long term there is still a little life left in the Index. The moving averages have not quite turned to the down side and momentum, for both periods, is still in the positive zone although moving lower fast. A rally from here would breath new life in the Index, at least for a little while.

MERV'S PRECIOUS METAL INDICES

It was nothing but losses for the various Indices but not as much as recent weeks. It looks like the down turn may be taking a breather but not necessarily a trend reversal. Looking at the tables of technical information and ratings the Indices are RATE(ed) as NEG (BEARISH) for the short and intermediate term periods and only the more aggressive or speculative Indices are not yet bearish on the long term. The Indices have had quite a tumble since reaching their peaks a few weeks back but although any downside hurts looking at an overall longer term picture we see that the drop (so far) has been miniscule versus the rise these Indices have had since the start of the bull, even since the start of the latest thrust back in May of 2005. As an example, although the overall universe of 160 stocks dropped an average of 21% since its top a few weeks ago it is still ahead over 100% since its low of May 2005. Even better it is still ahead by 1585% from the start of the bull market. That's an average performance for 160 stocks. Other of the Merv's Indices have even done better than that.

What this demonstrates is that speculating in the more aggressive gold and silver stocks can provide huge returns versus investing in the major gold companies. With this kind of performance there is lots of room for some errors and small losses, and losses should always be kept small. Huge losses are rare when using the technical approach with stop loss protection.

MERV'S GOLD & SILVER 160 INDEX

With a 2.1% loss on the week one should be grateful that it was not more. It seems like he downward thrust is starting to subside but let's not get ahead of ourselves. So far the AVERAGE performance of the universe of 160 gold and silver stocks is quite impressive. Up 1585% since the start of the bull, up 107% since its low last May and still up 32% for the year 2006 to date. Again I emphasize that this is an AVERAGE performance of 160 stocks not the performance of a single best stock in the group. Looking at a semi-log scale chart of the Index one really realizes how small the recent down side moves have been versus the upside over the years. Still, any downside hurts. It's a good thing readers to this service follow the technical discipline where the guiding criteria is to preserve capital. Most speculators should be out of the market some time ago and now waiting for a good time to get back in. It will come but not this week. RELAX.

From an intermediate term perspective we are in a bear trend as far as the overall universe is concerned. The Index is below its moving average line and the line has turned downward. As for momentum, it has just crossed its neutral line and is now in the negative zone. Combine this with an intermediate term overall RATE(ing) for the universe of bearish 93% and we can only be on the BEAR side at this time.

From the long term standpoint things are not yet as glum. The Index is sitting just above its positively sloping moving average line while momentum, although moving lower fast, is still in its positive zone. As far as the RATE(ing) is concerned for the universe, that stands at a bearish 61% for an advance look as to where those other indicators are heading. Because of the RATE(ing) I am inclined to be NEUTRAL on the long term until the indicators either turn more positive or go negative.

One will notice a little difference between the Index RATE(ing) and the RATE(ing) given for the universe here. The table rating is just that, a rating of the Index performance based upon weekly trading data. The % RATE(ings) given here are the combined rating of the individual component stocks of the Index.

With 62% of the component stocks closing lower on the week and only 32% closing higher the force is still with the bear BUT these figures are a lot better than last week and the trend may continue toward the positive side over the next weeks. Let's hope.

There were no stocks that made my arbitrary category of plus/minus over 30% weekly movers during the past week. In fact the best performance was only a 22% mover which suggests that calm may be entering the group.

MERV'S QUAL-GOLD INDEX

The quality stocks had a slightly better week than the overall universe but still negative at a loss of 1.2% on the week. As can be expected, these 30 largest precious metals stocks may not move as fast as the more speculative ones do, either up or down. This can be seen in its performance over the years. These 30 highest quality stocks have gained 417% since the start of the bull, gained 68% since the lows of last May and still ahead 8% for the year 2006 to date. Not as good of a performance as the overall universe but I guess we don't expect that from the quality. In showing these average performances for different groups of stocks one wonders why anyone would invest long term in such dullards as Barrick when there are exciting winners such as Southern Star to latch on to and ride the wave until it is over.

This week we had 30% winners and 70% losers, which is quite an improvement over last week's 100% losers. The overall component ratings are still miserable with a 100% bear rating for the intermediate term and a bear rating of 87% for the long term (versus 98% and 77% respectively last week).

On the intermediate term This Index is now well below its negatively sloping moving average line and momentum has crossed into the negative zone a week or so back. I must confirm the table Index RATE(ing) as being NEG or BEARISH at this time.

On the long term we have not quite yet moved into the bear camp despite the table RATE(ing). The Index is below its moving average line but the line has not quite turned fully downward, close but not quite there yet. As for momentum, the table proprietary indicator is already negative while the RSI is still just above its neutral line. I would be inclined to remain NEUTRAL on the long term rating, at least for another week

MERV'S SPEC-GOLD INDEX

This is where we start separating the men from the boys. Once you have removed the top 30 "quality" stocks from the universe the rest can be considered as speculative. At the very top of the general classification of speculative are the next 30 largest stocks after the quality. These are the component stocks of the Spec-Gold Index. Their average performance has been considerably superior to that of the Qual-Gold group. Since the start of the bull this group has advanced 2842% while from the May 2005 low the group advanced 74%. Since the start of the year the group is still ahead by 18%. This group of stocks seem to be weathering the latest down turn in the market a little better than the quality group.

This week we had 37% winners and 60% losers. As with all other groups, this is quite an improvement over the gains and losses of last week. The overall component RATE(ings), however, continued to deteriorate with an intermediate term rating of 93% bearish and a long term rating of 60% bearish (versus 88% and 40% last week).

On the intermediate term the Index is below its negatively sloping moving average line and the momentum is in its negative zone for an intermediate term BEAR prognosis.

On the long term, the Index has just closed slightly below its moving average line with the line turning towards the negative but not quite there yet. Momentum is moving lower real fast but is still in the positive zone. For now I will remain NEUTRAL but it doesn't look good.

MERV'S GAMB-GOLD INDEX

Where the Spec-Gold Index includes the 30 upper end of the speculative spectrum the Gamb-Gold Index includes 30 stocks from the lower end, the more nail biting kind of stocks. Their performance over time has been even more spectacular than the performance of the Spec-Gold stocks. Here, the average performance of the group shows an advance of 4718% since the start of the bull and an average advance of 151% since the May 2005 low. Since the start of year 2006 the group is still ahead by 76% despite some severe losses lately. Why would anyone want to go elsewhere for excitement and fun.

During the week we had 33% of the stocks closing higher and 53% closing lower. Not good but still a hell of a lot better than last week's almost total wipe-out. The overall group RATE(ing) declined a little further to an intermediate term bearish rating of 93% and long term bearish rating of 50% (versus last week's 92% and 38%).

On the intermediate term the Index is below its negative moving average line but the momentum is still in its positive zone. With a very minor decline on the week of 0.7% it looks like a bottoming process may be at hand and I will remain NEUTRAL for now.

On the long term the Index is still comfortably above its positive moving average line and momentum, although moving lower fast, is still in its positive zone. I should stay bullish on the long term but combining these indicators with the fact that the overall RATE(ing) has now slipped to the bearish with a 50% bear rating I will stay NEUTRAL pending better indicators one way or the other.

SILVER

Last week we looked in on a P&F chart of silver. The initial projection of $9.00 was almost met this past week with the sharp sell-off on Tuesday. The intermediate term is in a bear market with a negative moving average and momentum indicators. Long term we are still on life support with the moving average turning but not quite fully turned to the negative. Long term momentum is bouncing off its neutral line but very close to going negative. All it would take is another day or two of negative price action.

MERV'S QUAL-SILVER INDEX

One of the weakest of Merv's Indices over the past several weeks, the Merv's Qual-Silver Index has, however, been the best acting Index since the start of the bull. Although the various gold Indices started their bull moves in late 2000 the Qual-Silver Index didn't start its move until late 2001. Since the start of the bull this Index has advanced by 9481%, almost double that of the best gold Index performance. From the May 2005 low this Index is up 71,2% while for the year 2006 to date it is still up 17%.

For those investors that may be overly enamored with these performances it should be noted that since early 2004 the Qual-Silver Index has moved very little. In fact the Index is up only 10% in the past two years. Their big moves were from late 2001 to early 2004. Could it be that the shine is off the silver stocks?

MERV'S SPEC-SILVER INDEX

The Spec-Silver Index is a relatively new Index and therefore I do not have Index values going back to the start of the bull. This Index starts in Jan of 2003 but since the start it has advanced by 1032%. Since the May 2005 low this Index is ahead by 214% and for the year 2006 to date it is ahead by 66%. Although the performance of the top 10 silver stocks in the Qual-Silver Index may have gone into hiatus the more speculative silver stocks are still shining.

MERV'S GOLD & SILVER 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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