Technically Precious with Merv
A shortened week with nothing much really happening. Everyone should be back this week and we should see the market rumble again.
Despite over 5 years of a bull market it seems that only the past year has seen any REAL ACTION, at least that's what one would gather from the chart. A technician is often worried when such explosive action takes place because too often it ends up to be the end of the long bull. We'll have to watch this action to see if that is to be the case here.
Looking at the long term P&F chart we have a straight down move during the bearish break and now a straight up move during this rally. The move has taken the X plot right up to the previous up trend line but not yet above it.
I was first introduced to the P&F technique while attending a week-end seminar in Chicago back in the mid-1960's. The seminar "CHART FOR PROFIT" was given by Earl Blumenthal, one of the long time experts in this technique. I understand that many of his techniques subsequently became part of the Chartcraft P&F technique (Chartcraft being the acknowledged bible for the 3 unit reversal charting method.). Anyway, I recall a pattern which Mr. Blumenthal called the "high Pole at the bearish trend line". This was a bearish signal immediately following a bullish signal and had a straight up and then a straight down kind of action. This high pole is the opposite of what we seem to be having but I don't seem to recall that Mr. Blumenthal ever mentioned a "low pole at the bullish trend line" type of action. One of the criteria for the high pole pattern was a retracement of at least 50% of the initial "pole". We do have the opposite condition on the chart so one might imagine that the bear signal has been reversed by this retracement. Without fully remembering if there really was a "low pole" concept I will just put this out for your entertainment but reserve the right to say "I told you so" if it does end up in a new bull trend, otherwise you didn't hear it here. One of the marks of a true financial analyst is to be able to talk all day without really saying anything much while creating the impression of saying a lot and still being able to say, weeks or months later, "see. I told you so" regardless of what the market did --- I'm still trying to get the hang of it. Practice makes perfect.
From my perspective and P&F technique there still needs to be a whole lot more P&F action before I can say that the P&F chart has confirmed a long term trend reversal back to the up side. For now, although we have a good retracement, no bull signals have been activated and we are still, from the long term P&F chart perspective, in a bear market. Now, what do the other indicators and charts tell us?
The normal indicators are still okay from the long term perspective. Gold has once more moved decisively above its long term moving average with the average itself remaining in the positive direction. Using a daily chart for my momentum indicator, the long term RSI is showing signs of improvement inside its positive zone and the volume indicator remains above its moving average line, all for positive readings.
Although using only the normal indicators would put me in the bullish camp that P&F is still a problem so I will remain NEUTRAL for now.
As mentioned last week, in the process of changing the intermediate term P&F parameters to account for the rise in price from the earlier $250 level I got a chart with an up trend line that remains unbroken. This is not a 45 degree up trend line but one based upon the touching of the price action. The action touches this line in several places along the trend making it a powerful trend. Should the action reverse again and break below this line THAT would also be a powerful message. For now this P&F chart suggests a trend that is still a BULL trend and may be taken as both an intermediate term as well as a long term message.
Gold is just above its intermediate term moving average line and although the line was sloping downward it has now turned oh so slightly to the up side. Momentum is also inside its positive zone but seems to be on the verge of turning lower again. As for the volume indicator, it had been below its moving average line but is now once more above it. The line is still sloping downward and has not confirmed the volume indicator move yet.
With most of the indicators now confirming the message of the P&F chart I will reverse my bearish position of last week but not yet fully. For this week I am upping the rating to the NEUTRAL rating.
Now we come to the meat of the analysis. Who cares where gold has been or where it is in the long term sphere of things. We want to know where it's going to be tomorrow or where it is most likely heading over the next short while. On the short term the answer is easy but does have a few cautions.
Gold is above its short term positive sloping moving average line (15 DMAw) and momentum (13 Day RSI) has moved into its positive zone confirming the direction of the price move. Finally, the volume indicator is above its short term moving average line for a positive reading.
Now the cautionary indications. The rally has retraced 50% of the previous down move. To a technician this 50% retracement is often a stopping point for a rally. The Friday price is also at a resistance level from action in late May. Momentum, although in the positive zone, appears to be turning down.. The price action itself is just a hair above a preliminary upper channel resistance line and a reaction back into the channel may be expected. Lastly, although the volume indicator is positive the daily volume action is still very tepid. Shown on the chart is my 100,000 daily volume line (the red dashed line at the bottom). Throughout this advance the volume hasn't even come close to it unlike the daily volume action at the start of the last serious up trend in late March. Volume might diminish somewhat on the way up BUT one would like to see the START of a move confirmed by heavy volume.
Going with the trend in motion I remain BULLISH on the short term direction BUT must accept that there are some serious cautionary signs and a reversal very soon should not be overlooked.
Here we take a quick look at the very short term action to see if we can determine the most likely action in the next day or two. Maybe it's the holidays but the action this past week has been kind of slow. Friday seems to suggest a hesitation by whatever speculators were in the market to further buying. The aggressive Stochastic Oscillator has entered its overbought zone and seems to be flattening out. At this time it is difficult to assess if the oscillator will peak out and reverse as it did in early March or if it will top out but stay inside the overbought zone for weeks as it did in April and May. My guess would be a peaking and reversal process but that is only a guess. The guess is based upon the very weak volume action we have been having over the past several weeks. Should volume increase dramatically on the up side then I would reverse that guess.
Guesses aside, what to expect on Monday and Tuesday should be a continuation of trend, and that is still to the up side. A close below $630 may change that trend.
NORTH AMERICAN GOLD INDICES
Well, it's the turn of the AMEX Gold Miners Index to be looked at this week. Shown is a long term weekly chart going back to the start of the bull. We have a well defined up trend support line which was broken in 2004. These support trend lines have a habit of becoming resistance lines should the trend reverse back to the bull side, which it has in this case. The action during 2006 seems to be that of a Head & Shoulder topping action with a right shoulder that is weaker than the previous left one. I usually look for confirmation of the H&S pattern by checking the momentum indicator, in this case the 30 week RSI. Confirmation of the developing pattern would be given by a lower HIGH in the RSI at the head than at the previous left shoulder and even a further lower HIGH at the right shoulder. Don't look at the RSI lows. During a consolidation or lateral trend one would expect lower lows as the consolidation or lateral trend continues and it is not a real concern or indication of anything. It is the highs that are important here. The reverse is of course true for a reverse head and shoulder at a bear bottom. Anyway, the H&S is not confirmed due to the RSI peak at the head being slightly higher than at the left shoulder. We can still have a H&S here but it is somewhat less than a sure thing. Watch that neckline for a break below. That would give you the confirmation that a H&S has occurred. The projection in these patterns is simple. Calculate the amount of points from the top of the head straight down to the neckline at that point. Subtract this amount from the value of the neckline at the final downside break and you have the H&S projection for the move. Simple, not rocket science.
MERV'S PRECIOUS METALS INDICES
With continuing new readers to my commentaries I keep getting comments along the lines of "Why not expand your North American Indices comments and reduce your own Indices comments? After all, everyone has access to the North American Indices but not everyone has access to yours". My first reaction is to tell the questioner to buy my gold service but that would not be appropriate. I have continually made the point that my Indices lets you know better as to what is happening in the overall gold market and in various sectors of the market. The major North American Indices are too heavily weighted towards a few large gold stocks and not to the more popular smaller stocks (as an example, in the Gold Miners Index of 45 gold stocks Barrick alone represents an Index value of 13.4% while Kimber Resources has only a value of 0.1%, a 134 times difference) and they may not always be moving together. Speculators in the smaller stocks may be making a huge mistake if they base their decisions on the actions of an Index which reflects the large stocks. Another reason for focusing on my various Indices is to highlight the difference in performances between different sectors of the gold market. I hear so often that one should not "speculate" or "gamble" as it is too risky. Well, in comparing performances between different sectors one can gauge the risk level one if willing to take, for the potential profit that one can expect for the different sectors.
I am still in a state of flux as to how best to present the information relative to the various Indices. I want to be able to present as much relevant information that can be of use without spending an inordinate amount of my time and yours. This section will, from time to time, change in format as I experiment with different formats of presentation.
MERV'S GOLD & SILVER 160 INDEX
I have not found anywhere on the internet any other service that provides weekly information and ratings on a group of stocks as extensive as this Index provides. Subscribers get the full details of all individual 160 stocks. Here I provide my assessment as to where this group of stocks, as a whole, is going by an analysis of the group Index. The Index is, of course, based upon the AVERAGE weekly performance of all the stocks in the Index.
The Index of 160 gold and silver stocks declined on the week by a value of 0.07 to close at 2160.28, a decline of 0.003%. Let's just call it no change. On an individual basis, we had 48% of the stocks advancing on the week while 49% of the stocks declined. Again, a wash. In such a neutral market we did have one stock that made it into my arbitrary Plus or Minus over 30% weekly move category. That was Yukon Zinc Corp. which has been beaten down quite badly over the past few weeks and a sharp reaction was inevitable. That's what happened last week, now where is the universe of gold and silver stocks as far as the trends are concerned?
From the long term standpoint the Index is bouncing off my long term moving average line and the line itself continues to point upward. Long term momentum is still in the positive zone but showing signs of weakness. From this I would be inclined to continue on the bullish side as far as the long term is concerned. With a somewhat different momentum indicator the table of technical information has the momentum as - NEG resulting in a bearish overall rating. I will go with what I see using my preferred momentum indicator, the RSI.
On the intermediate term the Index is still below a negatively sloping moving average line. It might take a move above the 2250 level to turn the line around but that could be just one good week of action. Momentum was in the NEG zone but has moved slightly into the positive. It is also showing signs of weakness so the move into the positive may be short lived. All in all, most of the indications are still on the negative side but with some positives showing here and there so I will just cope out and go NEUTRAL for this week.
As for the overall ratings of the individual stocks for different time periods, they are very little changed from last week. The short term is still bullish overall while the intermediate term is bearish and the long term is neutral.
So, depending upon who's looking at what, we seem to be all over the place in market assessment for this universe of 160 stocks. That suggests a market that has not yet firmly decided where it is going.
MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV'S GAMB-GOLD INDEX
The three sector precious metals Indices (they include both gold and silver stocks) are lumped together for review. I found that reviewing them separately was too often just repeating myself. This format may change as time goes by.
Although in the past the Qual-Gold Index seemed to take the lead on the up side this week they all are working together, within a few minor fractions of a percentage. Unlike the universe of 160 which closed a very, very little on the down side these three sector Indices all closed on the up side but not enough for bragging rights. Where a difference is noted is in the weekly advancing and declining issues. The Qual group had a 60/40 split in favor of the advancing stocks while the other two Indices had the reverse, a 40/60 split in favor of the decliners. Still not much of a difference. As for the overall ratings of the individual component stocks of each Index, they are all BULLISH on the short term and NEUTRAL on the long term. It is in the intermediate term where we see a difference. The Qual-Gold is still NEUTRAL with a bearish % at only 30%. The Spec-Gold Index is just BEARISH with a 50% bear rating. The Gamb-Gold is the most emphatically BEARISH with a bear rating of 77%. As far as the ratings of the overall individual stocks are concerned it looks like they are not yet into a position to get too gung-ho on the buy side. I find the intermediate term time period the most important for these stocks and that period, as we see, is still not in too good of a shape.
As for the charts of the Indices they are showing a somewhat similar story. Using the RSI as the momentum indicator it is positive for both the intermediate and long term for all three Indices. As for the moving average information, the Indices are all above their long term moving average lines and the lines are positive in all three cases. For the intermediate term we have the Qual Index slightly above its moving average line but the line itself is still negative in slope. For the other two Indices they both are still below their negatively sloping moving average lines.
From the above I would surmise that the quality stocks are still in the best shape while the gambling variety are in the worst shape. The speculative are sitting somewhere in between.
This is still a trading market and not yet one for investors. Gamblers can nibble on a few stocks but should, except in the rare case, be ready to exit quickly should things suddenly turn sour. It is interesting to note that one of the strongest stocks during the past month or two has been Tyhee Development. Tyhee was originally stopped out in our recommendations with a 35% gain in mid May but re-recommended back in the beginning of June at $0.29. It is now ahead 83% in the past month and a half for a total gain of 147% taking into account the first gain. Gold and the various Indices are still not back to where they were at the time of the re-recommendation in Tyhee. This is the type of stocks to watch, those that move counter to the overall group or universe. Those stocks that maintain their positive trends while the overall market is still negative are the ones most likely to continue in their trends when the market reverses.
I enjoy reading your comments, and I do read each one, and encourage more. Only this way will I learn how my commentaries are received by the public and work towards improvements. Unfortunately, I may not be able to answer every e-mail but I will try to answer as many as I can (preference is, of course, given to subscribers). You may e-mail me at email@example.com.
MERV'S GOLD & SILVER INDICES TABLE
The table of gold and silver Indices includes 20 Indices as well as one currency and two metals. I have developed an Index of all of these components and reproduced it below. I still am not sure if it means anything but is interesting as a composite Index of Indices.
Well, that's it for another week.