Technically Precious with Merv

By: Merv Burak | Mon, Dec 18, 2006
Print Email

Most fundamental analysts see gold going through the roof, so why isn't it? Hell if I know, I just follow what's happening not what should be happening. You can't make money on "what should be".

DISRUPTION

Had a virus, or something, disrupt my computer system and put it out of commission, e-mail addresses are still somewhere out in cyberspace. Am still trying to recover but it did cause a missed commentary last week. Apologies for any inconvenience that may have caused.

GOLD

LONG TERM

With the year ending it's just about time to see where we are with gold. Here we have that new long term P&F chart with the $15 units (my previous long term chart was a $10 unit chart but as the action gained altitude those units caused too much volatility for a long term chart). As I had been mentioning for some time now, the long term P&F chart had last issued a bear signal several months ago and has not, to this date, reversed that signal. The reversal would come on a move through the $660 resistance (i.e. at $675) but that would bring us to the more critical resistance so I would really wait until $690 before validating any reversal of trend, from the long term P&F chart.

As for the normal chart and indicators, despite the past two weeks of negative activity these indicators are still not all that bad. Both of the long term moving average lines (the weighted and simple) seem to be at about the same location right now. Gold closed on Friday just a hair below the weighted line but right on top of the simple moving average line. Both lines are still sloping upwards but not too aggressively. The long term momentum indicator has been, for many weeks now, under performing the price move, although within the positive zone. It is once more heading lower and at a faster speed than its upward move. The strength of the price action (my definition of momentum) seems to be decidedly towards the negative. The volume indicator is also once more showing weakness but let's wait for the intermediate term analysis to have a better look at the volume.

Although the P&F chart remains bearish I will still remain BULLISH on the long term for another week. If we should have another weak week then I am likely to change that prognosis.

INTERMEDIATE TERM

Last we looked at the intermediate term P&F chart it was in a bull move, heading higher. Over the past couple of weeks it has reversed direction on the chart but is still a long way from reversing its bull trend. Although it still has that $715 projection there is a lot of resistance to an upward move at and below $675. If the bull continues then it might take a few more ups and downs on the P&F chart to gain the strength needed to overcome this resistance. Whether it has the stamina for such strength building remains to be seen.

As for the normal bar or candlestick chart and indicators, on Friday gold closed below its intermediate term moving average line although the line is still sloping upwards. The price momentum finished the week right on top of its neutral line (at 50.04, couldn't be any closer to breaking below) and seems to be heading lower. The volume indicator has been showing some weak performance lately and did not confirm the new rally high made by the price late last month. One might suspect the volume action as meaningless at this time of the year as speculators take a holiday.

The chart above has some additional features. First is the long delayed potential head and shoulder pattern. The right shoulder is getting a little long but still may be considered as valid. Normally the second rally in the right shoulder would take place AFTER breaking below the neckline. The neckline has not yet been broken and is around the $575/$580 level. The other feature of this chart is the Merv's bullish accelerating FAN trend lines. By my criteria on these FAN lines, the breaking of the second FAN trend line signals a reversal of trend (that was in Oct.) while we must still await the breaking of the third FAN trend line for a confirmation of the new trend. That we do not yet have.

For now I am going to a NEUTRAL position as the price has moved below the moving average line (very important) and volume action is not good. Next week might see further deterioration in the rating if it is a negative week.

SHORT TERM

Unfortunately, a short term reversal came a little over a week ago and we missed it due to the computer malfunction and loss of commentary. This week what we have is a continuation of the new bearish short term trend. With everything negative the best we can hope for is that the $614.40 becomes a support level from earlier Nov action. A support there could result in a short term head and shoulder pattern but that is getting ahead of ourselves. In my previous commentary (01 Dec 2006) I did mention that if the third FAN trend line in the short term momentum (13 Day RSI) was broken I would run for cover, short term wise. Well, that's where we are at. Support or no support, we are still in a bearish trend.

IMMEDIATE TERM

Now for Monday and possibly Tuesday, let's see if my guessing is any better than 50/50. My usual suggestion is to stay with the trend in motion unless there is clear evidence that a reversal may be starting. There is no clear evidence of a reversal at hand although the aggressive Stochastic Oscillator (SO) has stalled and has been moving sideways rather than down. It is just above its oversold line and starting to head lower. My guess here is that, baring unknown world events, we should see more downside ahead in the early part of the week.

NORTH AMERICAN GOLD INDICES

With four major North American Gold Indices we end up looking at each one on a monthly basis. This week the AMEX Gold Miners Index has its turn. We see the Index action on the chart still showing the potential head and shoulder pattern with an elongated right shoulder. I was asked why I call the pattern a "potential" pattern. Well, if I knew whether the Index was actually going to break below its neckline or not I could then be more positive. However, as the potential head and shoulder pattern has not been validated it is still only a potential. Unlike gold itself, this Index has not yet broken below its recent rally up trend line, but that could come any day now. All of the intermediate and long term indicators are still positive and one would stay with the trend in motion.

BUT in this case there are some indications that the trend is reversing and most likely heading back towards its potential head and shoulder neckline. I have drawn the neckline at 885, which is about an average of the three lows reached over the past several months. Although still rated as BULLISH on both the intermediate and long term it is a dangerous time to be thinking of new purchases. I would be inclined to wait for the trend to re-establish itself.

MERV'S PRECIOUS METALS INDICES

Things are starting to look a little bit dicey for the Merv's Indices. Although they are all still in the bullish camp they do seem to be turning around and appear ready to move a lot lower. Many of the Indices have shown potential double top patterns, or very close to it. A most noticeable double top pattern may be seen in the Merv's Composite index of Non-Edibles Futures Indices (see GLOBAL INDICES on the main page of the www.themarkettraders.com web site. When we see a rally take the Index back to its previous highs BUT the momentum indicator is nowhere to be found near its previous high we can assume that we have a problem with the strength of the rally. Always remember, technically at market tops the trend is still bullish although some indicators may be warning of trouble. That may be where we are at here so be on guard. It is only very shortly after the top that the trend changes to bearish. Fundamentally, the analysis changes to bearish close to the bottom and to bullish close to the top, or at least it does so often enough to be aware.

MERV'S GOLD & SILVER 160 INDEX

The average stock in this universe of 160 stocks closed lower by 2.4%. This was a little lower than the majors but the majors were very heavily affected by just a very few large heavily weighted stocks such as Newmont, Barrick and Anglo American, which closed on the up side. As in earlier comments, the intermediate and long term indicators and ratings are still positive (bullish) but there does appear to be trouble brewing ahead. This Index almost reached its previous high but with a very low momentum reading. The reversal to the recent rally has not yet taken hold but one should be prepared just in case.

Looking at the breadth indicators, I look at two here. The advancing versus declining issues confirms what the Index did during the week, while the overall stock ratings confirms, or otherwise, the position of the Index for various time periods. On the issues side we had only 27% of the universe gaining on the week while a full 71% of the universe declined. One might almost call it a rout. On the ratings side, they all moved slightly towards the negative side ending up with a short term BEAR at 55% (54% bull last week), intermediate term BULL at 62% (78% bull last week) and long term BULL at 58% (64% bull last week). So, although the weekly advancing/declining issues are pathetic the overall ratings confirm the indicators.

Although there were some double digit movers during the week, both up and down, there were no movers that made it into my arbitrary plus/minus 30% movers. Overt speculation one way or the other is not yet here.

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

The three sector indices had a varying loss this past week with the highest "quality" having the least and the most aggressive having the most. Despite two weeks on the down side (one for the Gamb-Gold) the sectors are still in comfortable positive territory on both the intermediate and long term. They do, however, look kind of toppy so this may not be the time to be jumping in thinking that the reaction is over. I am always (well, usually) one to wait for a trend or turn around to be confirmed before jumping in and the sectors, as with all precious metals, have not yet turned back to the up side. Give it some more time.

In general the weekly advancing versus declining issues were primarily on the declining side, as might be expected with the Indices declines. As for the overall component ratings, they have all basically moved lower but not by too much. On the Qual-Gold side the overall ratings are: short term BEAR 53% (last week it was a bull at 73%), intermediate term BULL at 82% (last week bull at 97%) and for the long term a BULL at 78% (last week a bull at 83%). For the Spec-Gold Index: short term BEAR 58% (last week it was a bull at 67%), intermediate term BULL at 62% (last week bull at 85%) and for the long term a BULL at 67% (last week a bull at 80%). As for the Gamb-Gold Index: short term BEAR 53% (last week it was a bull at 50%), intermediate term BULL at 50% (last week bull at 67%) and for the long term NEUTRAL with neither bull nor bear in control (last week a bull at 65%). These overall ratings confirm the indicators on the intermediate and long term, bull for both in all sectors BUT also confirms the reaction that is on-going at this time.

SILVER

Have you noticed how often technicians draw trend lines and especially parallel channel lines, as if they were something awesome? Unfortunately, by time one has enough trading data to be able to plot these lines, especially the channels, they are finished. One cannot expect these channels to go on forever. They end sometimes and that sometimes is just when you have spotted the channel trends. I say this as a pure technician. Channel trend lines ARE IMPORTANT and they are helpful but only for a brief while. Take the channels in the silver chart. Once the bottom was reached in Sept/Oct and the next rally started one could then draw the up trend line from the previous low in June. At this point we DO NOT have a channel but one just might jump the gun and assume we do by drawing the parallel upper channel line from the Sept top. This time we would have been right as the rally halted right at this line. We now have a valid channel but how long do we expect the action to stay within this channel and what would be our trading action as the price remains within this channel? I will get into these points in a later commentary, probably next week. Note the confirming channel in the momentum indicator.

As for the other channel, the short term one starting at the bottom in Oct, that channel could have been drawn through the bottom in late Oct with the upper line drawn through the top in mid Oct. The short term action remained within this channel for some time and could have been quite profitable trading within the channel from a short term perspective but once it was broken, look out below. As mentioned, more on channels and trend lines in a future commentary.

What's that old saying, "them that moves up the fastest can also moves down the fastest"? Silver has been out performing gold on the up side lately and this past week got it come-uppence. A 6.6% decline versus golds 1.9% decline sort of evens the score between the two. One starts to wonder if that is the end of the great silver boom or not.

One might say that silver has made a bearish double top (these patterns are never perfect). As such we can expect much more down side action ahead and one should be prepared (do you have your exit strategy operative)? Unless silver stocks do a quick reversal back to the up side that exit strategy may save you a lot of grief ahead. The indicators are still bullish or neutral for the intermediate and long term but they always are at the top. The latest direction is towards the bottom and if that direction continues then the indicators will follow very quickly thereafter.

MERV'S QUAL-SILVER INDEX
MERV'S SPEC-SILVER INDEX

The two silver sector Indices did not have as bad of a week as had silver itself. Both declined by less than 3% versus silver's 6.6%. Usually the stocks move with a magnification factor versus the metal. That will come if the metal continues lower. This week it's a wait and see what will happen next.

The Qual-Silver Index made a new all time high a few weeks back but on under whelming strength. Momentum was nowhere near its previous high and warned of potential false break. Well, the Index went nowhere since and appears now to be heading lower. Although both Indices are still BULLISH on the intermediate and long term one should step back and wait to see if the short term move, which is towards the dumper, turns around or not.

RECOMMENDATION

Make sure you have protective stop losses on all your stocks and sit back and enjoy the Christmas season. Here is wishing all a very happy and festive Christmas.

MERV'S PRECIOUS METALS INDICES TABLE


Click to open larger image in new window.

Till next 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.

Copyright © 2006-2011 Merv Burak

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com