Technically Precious with Merv

By: Merv Burak | Wed, Sep 6, 2006
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As one reader pointed out, since the top in May gold has been making lower highs and higher lows. It's come almost to a point now, no more room for highs or lows, and something's gotta give.

GOLD

LONG TERM

There is that old P&F chart with the $10 units. Its last signal was a bear signal and although there have been lots of ups and downs the action has set up a strong resistance at the $670 level, requiring $680 for a break out. On the latest $15 unit chart that would be at the $675 level due to the different units. Both the $10 and $15 unit charts had given us a downside projection that is almost identical ($490 with this chart and $480 with the $15 unit chart). Until the resistance level is decisively broken those projections remain valid.

There are a variety of charting techniques available to technicians. Some technicians swear by one method while others swear by another. Charting and interpreting the charts is an ART, not a science. My background is from the sciences or engineering (Aerospace) where 2 plus 2 is ALWAYS 4. In technical analysis, given two identical charts one may not get the same answer all the time. There are always nuances that come into play, always external happenings that may affect the next day's movement of the charts, in different directions. Therefore the interpretation of any chart must be considered an art form where your guidelines are past historical precedence and playing the odds of such precedence continuing. There are chart patterns that over the years have proved to be as much as 80% accurate in their outcome. This is not 2 plus 2 equals 4 perfection but is about as good as it gets in the analysis business. Most of the time patterns are not that accurate and require the "artistic" expertise to try and better the odds. You win some, you lose some. The name of the game is to lose less often BUT more importantly, keep the losses small and the winnings large. You do not do that with a blind buy "quality" and hold for the long term type strategy. Whatever you buy, whether "quality" or junk, your strategy should be to buy but get out fast as soon as the trading has indicated that the price direction is not in your favor. Limit your losses or protect your gains. Waiting to break-even is a recipe for disaster and more importantly keeps you from putting the capital to potentially better use elsewhere. Hold it - I need a breather.

Once I get started I am never sure where I will end up. I forgot what my original point was of that rumination above. Oh well, on with the technical analysis.

With the May high and the June low (see the chart in the Short Term section) the action has continued in a lateral direction but with ever decreasing highs and increasing lows. We are almost at the tip of a triangle pattern that one might draw from such action. I'll leave the short term analysis for later. For mow we can see from a bar or candlestick chart that the action over the past few weeks has been taking place just above a gently positively sloping long term moving average line. The last three lows in this oscillating activity have stopped almost on top of the moving average line. The triangular pattern one might draw from the recent activity might suggest that the outcome will be a break-out to the up side. Triangular patterns are most often continuation patterns. But in looking over the other indicators there is no indication of inherent strength behind the recent activity to cause an upside break. Lack of internal strength usually results in weakness, a break on the down side. This is an example where one might go against the odds of a pattern and go with a more "artistic" evaluation of the recent market action. The long term price momentum (strength), although still in its positive zone, has been showing a slightly weaker condition than the price with lower lows in its oscillating activity. The lows are minor but still lower than previous lows. And the volume has not been encouraging lately.

All in all, going strictly by the pattern and indicators I should be bullish but will remain NEUTRAL due to the continuing bearish P&F chart and the "artistic" interpretation that all is not what it seems to be. I hope I am proven wrong and will have no problem changing the prognosis quickly should the action justify it.

INTERMEDIATE TERM

A nice run from last June to this past May and a lateral drift since can be plainly seen on the chart. The lateral drift is quite noticeable when one views the intermediate term moving average line. It is almost horizontal but is pointing slightly in the downward direction. The action in the price of gold has been oscillating above and below the line giving technicians nightmares. Momentum has also taken a lateral drift and is hugging its neutral line but a slight negative tone can be seen here also.

Another week with the P&F action above its up trend line from the 2000/2001 lows. The action continues to be very close to breaking below this line but still requires a move to the $610.00 level to break the trend line and $600 to break the next support. It continues to be a nail bitter event.

Because everything is so close to breaking on the down side that I will continue with my NEUTRAL rating until the bull becomes stronger or the bear has taken over.

SHORT TERM

Well we now come to the nitty-gritty. Who cares what the long term looks like, we want to know what's happening now and what are the prospects of it continuing?

On a short term basis we are still in a very well defined higher lows and lower highs scenario. However, that scenario is coming to an end one way or the other. We are almost at the apex point of such oscillations and must break out from here. Gold closed Friday still just above its short term moving average line and the line has turned up slightly. This, however, is no great shakes as we are in an oscillating region with the price and moving average going up and down several times over the past few months. Short term momentum is right on its neutral line but has been showing weakness by spending much of the past few weeks in its negative zone. No great encouragement here. The volume action (not shown) has been very low indicating speculator disinterest in gold at this time. Some may come to the conclusion that this is great as they can then buy futures or options easily without getting killed during volatile speculative action but you do need those speculators to move the price.

I wish I could say with certainty what to expect in the short term but the action lately has been so neutral that anything could happen. Watch for the price to go through the down trend line BUT also look for increased volume with such action or the longevity of such move may be in doubt. On the other hand should the price move below the up trend line it "don't need no" increased volume to move it considerably lower, just a lack of buyers.

IMMEDIATE TERM

There is nothing much I can add relative to the immediate term potentials. Looking at the Stochastic Oscillator, it seems to have firmed up a bit and may be signaling a few days of upside in the early part of the week but that's about all for any difference versus the short term.

You can't get a period with a more neutral reading of the recent action than the period right now. Other than the SO which one might take as suggesting an upside day on Monday, I would not be inclined to venture any guess as to what to expect. I know some think that we get paid these big bucks to make bold predictions but there are times just to sit back and let the following action suggest what's to happen. Wait for it.

NORTH AMERICAN GOLD INDICES

It's the turn of the AMEX Gold Miners Index to be reviewed this week. What jumps out at you from this chart is the upward sloping wedge pattern. Unfortunately, this is a bearish pattern which has a nasty habit of breaking on the down side, continuing the trend that preceded it. Now, if we can only see our way to looking at the upper line as being horizontal then we would have a bullish pattern (we have such a pattern in the PHLX Gold/Silver Sector Index chart). Fun with patterns. Although I am a trend person which requires the following of indicators, when we get into lateral periods where there may not be a trend to follow then patterns come into play.

The action period shown on the chart may be viewed as an elongated left shoulder of a mangled head and shoulder pattern (the PHLX pattern is a little more like a head and shoulder). This is another reason for suspecting that we are about to see more downside action in the near future. The shoulder needs to be completed with a break below the neckline (not shown) for the H&S to have been completed. Otherwise, up, up and away we might go. With the neutral lateral type action over the past few months our only technical assessment is from the pattern side of analysis.

MERV'S PRECIOUS METALS INDICES

Despite the relatively neutral action in gold, the various Merv's Indices are showing a more bullish picture. All the Indices are moving into new recovery highs and none are rated as NEG or even - N in the Indices table, for any time period. The only cautionary note has no real technology behind it. It is just a "feeling". That is the fact that since the sharp decline in May/June any rallies lasted for two weeks and then the decline continued. We have now finished the latest two week rally. Is it time for another decline? To try and find a positive spin into this "feeling" we look at the overall universe of 160 Index chart and see that although previously the declines took us to new lows the latest decline, the one just prior to the latest two week advance, was minor and ended as a higher low breaking the earlier pattern.

Last week I showed the Merv's Composite Index of Precious Metals Indices in the Indices Page. On the chart I was able to draw an upward sloping wedge pattern, the type that "usually" breaks on the down side. Well, this week the Index did break through the wedge but on the up side in continuation of the rally in the Precious Metal Indices. Looking at the price action of this Composite Index one would be very encouraged as to the direction of the precious metals market. However, the one constraining feature is the strength (momentum) of the recent upside action. The momentum indicator is not showing any great strength in the move and this may have serious consequences for the move longevity. Follow the trend but do so with extreme caution.

Non-Edible Futures Commodity Contracts

As most of my readers know, I produce a weekly table of technical information and ratings of 27 non-edible futures commodities. This table is available free on the home page of the web site www.themarkettraders.com. As I had done with the Precious Metals Indices I have also done with the Non-Edible Futures. This week I have completed a Composite Index of the 27 Non-Edible Futures Commodities contracts. It is shown with the table this week. A very interesting composite Index. I have back dated the Index to the start of 2004 so there is only a little over two and a half years of data but the overall bullishness of these non-edible futures is unmistakable. I invite anyone interested in futures to take a look.

MERV'S GOLD & SILVER 160 INDEX

Well let's see what's happening to our universe of 160 gold and silver stocks. First, the chart. Everything looks rosy at first glance. The Index has just peaked its head into new recovery highs with both the long and intermediate term moving average line following with an upward slope. The momentum indicators for both time periods are in the positive zone BUT their recent action does not indicate any great improvement in the strength of the recent Index move. This strength needs to perk up more for the Index to continue moving higher. However, despite this one cautionary indicator all looks well for both time periods.

Second, we look at the breadth of the Index activity. I've been asked what I mean by the "breadth". Breadth is looking at the actions of the individual component stocks of the Index rather than the Index value itself. There are two breadth informations I look at in these commentaries. One is the number of component stocks that advanced versus the number that declined. This advance/decline information provides the visibility as to the overall movement of the component stocks. You could have an Index advancing on the week while more individual stocks may have declined. This suggests that the advancing stocks had larger % gains than did the declining stocks and their % losses. The other breadth information is the overall ratings of the component stocks. In the stock tables for the Indices, each stock is given a technical rating (for each time period). At the bottom of the table is an overall percentage BULL/BEAR number which shows the % of component stock that have a positive rating and the % with a negative rating. This is an important indication of overall trend and confirms (or not) the rating of the Index itself for each time period.

So, on the week we had 101 stocks advancing (63%) and 48 declining (30%). Not a bad overall weekly performance. If that ratio continues then we should expect to see the momentum improve. As for the overall ratings, the short and intermediate term ratings improved during the week with both now being in the bullish side with 58% bullish on both periods. The long term rating also improved but only slightly so. It moved from a bearish rating last week into a neutral position this week with neither bull nor bear over the 50% level. The trend in the breadth information is in the right direction but still could use some better numbers, especially in the ratings.

MERV'S PRECIOUS METALS SECTORS

MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV'S GAMB-GOLD INDEX

The three gold sector Indices all performed almost the same during the week. Only a fraction of a % differs from one to the other. All were ahead with advances in the 3.5% area. Although each chart is just very slightly different from the other they all are moving into new recovery highs with their intermediate and long term moving averages following right behind and sloping upward. Both time period momentum indicators are in their positive zones, for all three Indices. All seems to be in order for a good market ahead - EXCEPT

As with the universe of 160, the momentum indicators are not showing any significant improvement in underlying strength that would project the Indices considerably higher. This might change but one would like to see the change before risking capital otherwise the risk is elevated.

In general the breadth indicators all improved a little during the week with very slightly higher % advancers and very slightly less decliners. The ratings also improved, but only a little. The least improvement is still in the gambling stocks. Speculators in gold stocks are still not all that convinced that the rally has any longevity and are holding back jumping into the gambling variety of stocks. Once they become more convinced that the rally is in fact a new bull market then one will see these gambling stocks make enormous % moves.

SILVER

Boy, what a different picture one gets looking at the silver chart versus looking at the gold chart. The silver rally seems to have much more steam than does gold. The trend has now remained within an up trending channel for over two and a half months, which is a long time to stay within a confined area. The volume action here is considerably better than the volume action in gold. The only problem area is momentum. Although much stronger than the gold momentum the recent price move into new rally highs has not been accompanied by new highs in momentum. Are we about to reach a top in silver? The intermediate term trend remains intact as long as the price continues to stay within the channel.

MERV'S QUAL-SILVER INDEX

The Qual-Silver Index had a good week gaining 6.9% on the week. This is twice the average for the Merv's Gold Indices and three times the average for the North American majors. It should be obvious that the indicators are all positive here. We only had one declining stock on the week with 9 advancers. The ratings have improved slightly with the long term rating becoming a BULL rating with 55%. This and with the Qual-Gold Index are the only Indices that have moved into the positive long term BULL rating. Quality is what is moving at this time. Quality usually moves first then followed by the more speculative as speculators gain more confidence in the longevity of the trend. At this time that confidence is not there yet.

Last week I showed what the Qual-Gold Index table looked like, this week I include the Qual-Silver table for your information. These tables are just some of the information provided to subscribers of Merv's Precious Metals Central, each and every week.


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MERV'S SPEC-SILVER INDEX

The Spec-Silver Index was the second best performer on the week although at two thirds the performance of the Qual-Silver Index. Along with the Gamb-Gold Index it had the worst advancing versus declining issue performance of the week. Only 56% of the stocks advanced while 40% declined. The ratings improved somewhat but the long term rating has still not moved into the BULL category. It is at NEITRAL with neither BULL nor BEAR in control.

MERV'S PRECIOUS METALS INDICES TABLE


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Well, let's call it another week and see what happens next.

 


 

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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