Technically Precious with Merv

By: Merv Burak | Mon, Nov 13, 2006
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Thursday's $18.50 up move was the best since late June but unlike that move there was no follow through on Friday, and the earlier move went nowhere. So, where to from here?

GOLD

LONG TERM

Here we have our old long term P&F chart with the $10 units that had done us good work throughout the gold bull market. While it was in the $300/$400/$500 area it did us good work by filtering out the shorter term volatility. Once it got into the higher levels the volatility became too noticeable and larger units were required, so we settled on the present $15 unit as being reasonable. I thought I'd show the original units chart today just to show the recent bullish break-out on it. We have both a break above two previous highs and above the down trend line. This break projects the move to the $690 level, slightly less than what the intermediate term chart gave us last week. With the units of this chart now representing a considerably lower % of the gold price (at these levels) one might continue using this chart but consider it an intermediate term one (unless the price drops back to the $500 and below level). I will continue using the intermediate term chart shown last week, i.e. with $5 units and a 3 unit reversal.

This emphasizes something that new or inexperienced technicians often fail to understand. First, there is no such thing as a static P&F chart. One must be prepared to change one's units and unit reversal as the situation requires, as noted for gold. Second, in P&F there is no such thing as a single chart to represent a trend. As indicated above, we could have two different intermediate term P&F charts by using different units and unit reversals. When using P&F one must be flexible. I know there are two "bibles" in the P&F charting discipline. One is for the single unit reversal method as expounded by Alexander H. Wheelan in his "Study Helps in Point and Figure Technique" and the other is for the three unit reversal method as published by Chartcraft Inc. in their book "The Three Box Reversal Method of Point and Figure Construction and Formations". I take the best (and sometimes, unfortunately the worst) of both methods and prefer, but not always, a 2 unit reversal method that I devised many, many years ago. If it works, use it.

Where was I? Oh yes, although the above P&F chart shows a bullish break the new long term P&F has still not done so. We are still under the influence of a long term bear and would require a move, at the present time, to at least the $675 level (but better yet, to $690) before we have a bullish reversal. This one chart is still bearish, let's see what the bar or candlestick chart and indicators tell us.

The action during the week all took place above the long term moving average line. The line turned up the previous week and continued to slowly rotate further towards the up side this week. Price momentum continues to move in the slightly positive zone. It has not shown any great strength recently and for the past few months could be better classified as a positive neutral (+ N) indicator. By this I mean that it is in the positive zone but moving in a lateral direction showing no real strength or weakness. Looking at the volume indicator, it continues to track above its positive moving average trigger line.

All in all, I will continue with my BULLISH long term position but keeping in mind that there is one major chart, the P&F, that is giving me an opposite story for now.

INTERMEDIATE TERM

Although the action during the week had some interesting ups and downs all it did for the intermediate term P&F chart shown last week was add one extra X to the trend. This P&F chart is still in a bullish trend heading towards its projection of $715.

Looking at the chart above one can visualize a head and shoulder pattern that coincides with the patterns seen in the major North American Indices. However, I would not be too quick to call this a H&S yet. I look for confirmation from the momentum indicator by giving me a negative divergence at the head location. We did not get that here as the momentum indicator made a new high along with the price. We could still have an H&S pattern but it's not such a sure thing.

What we do see here is the action continuing above the intermediate term moving average line with the line well on its positive upward track. Momentum continues to be positive but without much enthusiasm. This lack of strength from the momentum indicator is a concern and may be hinting that the bull may not last long. We'll just have to watch out for any negative surprises and be on guard. The volume indicator (not shown) continues above its positive moving average trigger line. It has, however, not been keeping pace with the price action and has shown a negative divergence on Thursday when the price made a new high and the volume indicator did not. Another indicator that needs watching.

Despite some negative vibes I remain BULLISH on the intermediate term.

SHORT TERM

The first few days of the week were starting to look ominous but Thursday put everything back on track without reaching a reversal of trend point. The worrying part is the non-follow through on Friday. The price remains above its positive trending moving average line (15 DMAw). Momentum is also positive but showing signs that it might want to reverse. It did not confirm the new price high on Thursday and is getting mighty close to its up trend line. I find these trend lines drawn on momentum indicators to be often more reveling and better developed than ones you might see on the price chart. However, the daily volume action may be perking up a bit. There seems to be a very slow but steady improvement in the daily volume action as can be seen by the trend line drawn on the chart. The magnitude of the daily volume still leaves a lot to be desired but the trend of this volume looks interesting. I am still bullish on the short term (the old going with the trend in motion) but would be very cautious should the momentum drop below that momentum up trend line. I would definitely reverse that bull if the price should close below Thursday's low.

IMMEDIATE TERM

It came very close to reversing the immediate term trend on Wednesday but all was righted. There may be problems ahead for the immediate term. The Stochastic Oscillator is just on the very verge of dropping below its up trend line for a serious very short term reversal notice. It is already below its moving average trigger line. The Friday close was almost on top of the very short term moving average line and the line itself has the hind of starting to turn towards the down side. There may yet be more upside days ahead but the signs are looking stronger for a trend reversal, at least for a few days. That may then change the other indicators on the short term. My guess would be for a lower day on Monday, how much lower is going to be important.

NORTH AMERICAN GOLD INDICES

I thought I'd show this week's North American Index in the same view as the various Merv's Indices are presented for comparison. This week is the turn of the AMEX Gold Miners Index to be presented. It is an Index of about 40 gold mining stocks and may be considered a mix in between what I have as the quality sector and the speculative sector. However, its performance is almost identical to my quality performance. The Merv's Qual-Gold Index rose 570% from the low in 2000 to the high in May of this year. During the same time the AMEX Gold Miners Index rose 562%, just a little lower. It should be noted that the quality Index, the PHLX Gold/Silver Sector Index, rose only 287%. Of course it's a run away if you compare the similar performance of the Merv's Spec-Gold Index (up 3578%) or the Merv's Gamb-Gold Index (up 6251%) during the same period. As the old saying goes, if you don't toot your own horn, it goes untooted.

We can clearly see the developing Head & Shoulder (H&S) pattern at the right side of the chart. It is developing because it has to do one of two things to either be validated or nullified. A move into new bull market high territory would nullify the pattern, a break below its neckline (not shown but at about the 900 level) would validate the pattern. For now it's wait and see.

MERV'S PRECIOUS METAL INDICES

It was another good week with the Merv's Indices out performing the major North American Indices. There is no big secret why this so often happens. Although many of the Indices have the same component stocks the weighted method of calculating the Index value used by the majors places maximum emphasis on the large companies and very little emphasis on the smaller ones in the Index. My method of giving each stock equal weight towards my Index calculation often favors the smaller companies as they are most often the greatest movers. If I applied a weighting system to calculating my Indices their performances might not be that much different from the majors. BUT you would not know how the stocks are REALLY performing, only how the large stocks are performing.

MERV'S GOLD & SILVER 160 INDEX

Missing from the performance comparisons talked about in the previous section is the performance of the overall universe of 160 stocks. Here we have a somewhat different performance. As the Index chart shows, the overall universe of 160 stocks really started its bull market in late 1998 and had already advanced 214% into early 2000 before taking a lateral trend breather. From its low in late 2000 to the high in 2006 was another 2585% advance. If we take the full bull market move from the 1998 low we get a total advance of 5910%. Numbers, numbers, -- but what has it done lately?

The overall universe gained 3.1% on the week, almost double the best performance of the major Indices. As the table shows, this Index is BULLISH (POS) for all investment time periods. The summation of individual stock ratings confirms this with a BULL 80% on the short term, a BULL 78% on the intermediate term and a BULL 54% on the long term. Last week this long term rating was still in NEUTRAL territory.

Although not shown on the Index chart, the long term momentum indicator has shown the strength of the universe bull market quite well throughout the bull. We see that in late 1997 the Index and momentum made bear market lows. Then in late 1998 the Index made another significantly lower low but the momentum stayed above its previous low for a strong positive divergence message. This was the final low for the Index before starting its long 8 year bull market. The long term momentum continued to improve and moved into its positive zone in early 1999. It has been in the positive zone since, except for two brief periods, one in late 2000 and one in early 2005. Now we come to the recent action. The momentum had given us a serious negative divergence when the Index made its all time high in early May of this year, versus the high in early 2004. Since then the Index has reacted negatively and the momentum continued to get worse. It almost dropped into the negative zone a few weeks ago but has stayed in the positive. The Index has been rallying quite strongly over the past few weeks but the momentum, although also moving higher, has been doing so in a very restrained manner. I would interpret the actions of the momentum indicator as warning us that although we might see higher Index levels from here there may still be more lower ones. What is probable is that over the next year, or more, we might see the Index moving up and down but not making any new all time highs or any new recent bear market lows. If it was going to do either, the most likely, from the recent action, would be new lower lows. Just a guess from the momentum action.

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

My three gold sector Indices were all winners on the week with the Spec-Gold advancing 4.0%, the Qual-Gold advancing 2.5% and the Gamb-Gold behind the pack with only a 1.9% advance. The problem with the Gamb-Gold Index was an almost even split between advancing versus declining issues and a couple of stocks with double digit declines. Nothing serious yet. The Gamb-Gold advance was still better than any of the major Indices.

The Indices continue to improve slightly but the assessment of last week remains unchanged, BULLISH for all three sectors, for both the intermediate and long term. There is no need to go into any great detail this week. One point that is still interesting is that the gambling variety of stocks have not yet taken off into the over speculation level. This suggests that either the rally does not have longevity or that there is still plenty of up side remaining in this market. Rather than trying to look too far ahead and speculate on wishful thinking I will just analyze the action week to week and see where we are rather than where we would like to be.

SILVER

Silver continues its stronger than gold performance with a 3.8% advance this past week versus gold's 0.1% advance. Silver looks to be ready to take on its previous high from early Sept and another day or two of upside action might do it. On the other hand the rally since early Oct has not been with any great strength. Both underlying momentum and volume action leaves much to be desired. Although volume action has been continually ahead of the price action (good) the new rally high on Thursday was not confirmed by a new high in the volume indicator (bad). Maybe it was just an anomaly or maybe there is starting to be quiet behind the scenes hesitation on the part of speculators towards further support of the silver bull. Time will tell.

MERV'S QUAL-SILVER INDEX

The performance of Merv's Qual-Silver Index since the start of the great bull market is not unlike that of the various gold Indices. The main difference is that the start of the bull move really didn't get going until late 2001, a year later than most of the gold Indices. Since that low to the high earlier this year this Index gained 1392%, most of which took place during the two year period of 2002 and 2003, up to very early 2004. The Qual-Silver Index continues to show strength and may be the Index to watch as a leading Index of what's to come.

MERV'S SPEC-SILVER INDEX

This Index is a relative new comer and does not have the historical data to know how things performed since the early start of the bull. What we do know is that since mid-2003 to the top earlier in this year the Index gained 1367% as opposed to the Gamb-Gold Index gain of 768% during the same period. This Index had basically two great periods, first from mid-2003 to early 2004 with a 396% gain and the other from May of 2005 to May of 2006 with a 321% gain. It almost seems like it is on its way for a third major move. Everything seems to be GO with 82% of the component stocks in bullish intermediate term trends

RECOMMENDATION

It looks like we may be in the early phase of a new bull market in precious metals with the possibility of new all time highs ahead. This is, of course, the riskiest time to be investing in the stocks BUT also the most profitable. Depending upon your risk level now may be the time to be back into the market in speculative stocks. These will give you the best performance should the new bull continue but are also the ones one needs to watch most carefully should the bull collapse. ALWAYS have an exit strategy in case of surprises. Invest for maximum profits while protecting your capital from disastrous losses.

There were many stocks that retained their bullish positions throughout the recent market correction. They were principally stocks that were strong to begin with and had started their bullish move considerably earlier. Southern Star Res. Ltd. is one such stock. By the technique programmed into the Merv's Precious Metals Central tables of technical information and ratings, Southern star turned POS (i.e. bullish) in mid-July 2005 at $0.29. Now, some 1580% higher in not quite a year and a half, is Southern Star ready for a sell? Momentum has been weakening but still positive, however the price seems to be going nowhere recently. When the time comes to get out, the tables of technical information and ratings should get you out early before you lose a major portion of your profits.

MERV'S PRECIOUS METALS INDICES TABLE


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Let's call it another 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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