Technically Precious with Merv

By: Merv Burak | Mon, Jan 8, 2007
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Time to wake up after the holidays. A mean week but things may not be all that bleak, if you ignore the metals, energy, financials, utilities, etc. Well, the technologies weren't all that bad this week. But let's look at gold.

GOLD

LONG TERM

Well I guess its about time to take another look at the long term P&F chart. This chart has been in a bear mode since dropping below the long term up trend line in June. Since then it has not been able to break above two previous highs. With the latest action we now have a lower break-out point to address. A move to the $660 level would now place this chart in a bull mode but with the action this past week one must wonder if that is in the cards, at least for the near term. At the June break this P&F chart projected a move down to the $480 level and that projection is still in effect.

I just noticed that the up trend line on the chart starts at the wrong point. It should have started from the bottom of the O, not from the center. Therefore the line should be moved a minor amount to the right otherwise nothing much is changed.

Looking at the normal indicators, Friday changed a whole lot as far as some of these indicators are concerned. Gold closed below its long term moving average line and the line itself has turned down on the Friday action, at least on the daily chart. The price momentum indicator is still in the positive zone but heading lower aggressively. It wouldn't take much more negative price action to cause the momentum to go negative. If it does it would be only the second time it would have gone negative since the start of the gold bull market some 5-6 years ago. It went negative for a few days in May of 2004 but quickly recovered. It will be interesting to see how this works out as a major move below its neutral line may really spell a death in the market. Looking at the volume indicator, it has been below its long term trigger line for over a month now and is making new 3 month lows, weaker than the price action. However, the volume may just be affected by the lack of speculators during the holiday period. They should all be back this week.

Unfortunately, after Friday's action I can no longer remain positive from the long term gold prospective. I am back to the BEARISH side until more emphatic upside action enters the picture.

INTERMEDIATE TERM

As one might imagine, the intermediate term P&F chart has broken below two previous highs after the Friday fiasco BUT it is still above its up trend line so we have a reversal warning for the P&F but not yet a reversal confirmed. A move below $600 will do it, however, and give us a projection down to $565, i.e. the Oct low.

The normal indicators are telling their own story. Friday's action crashed below the intermediate term moving average line and as with the long term, the line turned down at the same time. The action broke below an intermediate or short term head and shoulder pattern which I will discuss in the next section. The price momentum indicator has not been able to breach its previous high from the July rally (as the price has not been able to do either) and is now back in its negative zone and heading lower. The volume indicator continues below its negatively sloping trigger line for a negative reading.

We're back to too many negatives so I must go back to the BEARISH camp until the action verifies otherwise.

SHORT TERM

Well, this (and the next section) is where we try to guess if what happened last week is expected to continue or not. I wish I could say that the down side will end quickly but that is not yet being broadcast to me from the indicators. As the chart on the next page shows, we have broken below what I would consider more of a short term head and shoulder pattern. This break projects to the $573.50 level which is just above the level that the intermediate term P&F would project to once it confirmed the reversal. The past week's action may remind one of the action in October except for one thing, that action was after a significant decline had occurred. We are only at the beginning of a decline so it's more like the action in early September. With momentum (the 13 Day RSI) already in the negative zone and pointing lower one can only assume that the $575 (plus or minus $5) is to be expected. Once there the question would be "is it the end of the decline?" We wouldn't know that until the time comes.

From the short term perspective I can see that Oct bottom being met and from my perspective, possibly exceeded.

IMMEDIATE TERM

The short term does not look all that great, how about the next day or two? Well, sharp sell-offs such as we have had these past couple of days do not last long before a reaction of sorts takes hold. The Stochastic Oscillator (SO) is already in its oversold zone and at worst could be ready to halt and move sideways. That's about the best I can say at this time. Unfortunately, I cannot see a significant rally for here. Much lower levels need to be reached before we can see a rally in the works. So, that leaves, at best, a lateral motion possibly starting in a day or two.

NORTH AMERICAN GOLD INDICES

We're back to the AMEX Gold Miners Index this week. As indicated last week, this Index had a 21.9% advance last year but you sure wouldn't know it from the chart. It had been more of a lateral year. Although the action is still within what some might call the right shoulder of a major head and shoulder pattern that shoulder is now getting just too long for my liking. There are other indicators to watch. One pattern that has caught my eye is that short term decelerating FAN. We have just broken the third FAN trend line for a confirmation of a reversal of trend. The target for this FAN is back to the apex point of the FAN. That is the Oct bottom.

Although the action last week was not unlike gold, Friday was a little different. After a sell-off the Index recovered and closed near its starting point. This recovery may take it into the first few days of the week so do not be surprised if the gold shares recover somewhat over the next few days.

MERV'S PRECIOUS METALS INDICES

Last week I provided the 2006 yearly performance numbers for the Merv's Indices. They were pretty good. Now, reality set in this week with losses in the order of 4% to 7%. The All Mighty does not want one to get too cocky with the performances.

Looking at the table of Gold indices all one can see from the short term perspective is NEG ratings for all Indices. As for the non-Indices, the US $ is doing what it does and going counter to the gold trend. Gold is NEG but Silver is still at a -N rating. For the other time periods the ratings are a mixed bag at this time.

As for the Composite Index of Precious Metals Indices, that Index had made a lower low in Oct versus its low in June and has now made a higher high in Dec versus its high in Sept. This gives us a chart pattern often referred to as a megaphone pattern. In a megaphone pattern the upper and lower trend lines diverge from one another as time goes by. This differs from a wedge pattern where they converge or a channel where they remain the same distance apart. Unfortunately, if the megaphone is broken it is usually broken on the down side so we shall have to wait and see if that is the case here. Occurring after a previous major rise this has serious implications for the gold Indices.

As for where the Composite Index rates, well for the long term the Index is just on top of its moving average line while its momentum indicator is still above the neutral line for a still not bearish rating. With the negative action this past week I would not rate it as bullish either so that leaves a NEUTRAL rating for this week. The intermediate term is a bit clearer. The Index has dropped below its moving average line, the line has turned downward and the momentum indicator has just broken below its neutral line. All in all, BEARISH on the intermediate term.

MERV'S GOLD & SILVER 160 INDEX

There have been a few changes to the components in the 160 universe and I expect to have a few more changes over the next couple of weeks as I try to make the 160 components a little more representative to what's happening in the real world of exploration stocks. I continue to try and ensure that the top 60 market valuation stocks traded on the North American markets are included in the universe (and even the top 100). The top 30 make up the Merv's Qual-Gold Index while the next 30 make up the Merv's Spec-Gold Index. The rest are gambling stocks that have been or are expected to become active traders in the market.

The universe of 160 stocks declined on the week by an average of 4.7%. Bad, but not as bad as the major North American Indices which were in the 6% to 7% loss area. Along with this Index loss was the fact that 84% of the component stocks declined on the week with only 11% advancing. A miserable week in all. In summing up the ratings of the 160 component stocks we get an overall bearish rating of 78% for the short term and 55% for the intermediate term. The long term is neither bullish nor bearish but in the neutral category. No stock was able to meet my arbitrary plus or minus 30% weekly move to suggest over speculation (in either direction) but two stocks did make it into the 20% level, one plus and one minus. The activity during the week, although miserable, was not panicky in nature.

As for where the Index stands, we have a similar megaphone pattern here as with the Composite Index mentioned above. On the long term the Index is still some distance above a positive moving average line and the momentum indicator is still some distance above its neutral line for a still BULLISH rating. On the intermediate term the Index has just moved below its moving average line but the line, although turning towards the negative, is still positive. The momentum indicator is also moving rapidly towards the neutral line but still in the positive zone. I would rate the intermediate term as NEUTRAL, heading towards the negative.

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

For this week I have taken the Gamb-Gold Index out and looked at it separately. The Qual and Spec-Gold indices are a lot alike so I have retained then together. Although their weekly loss is somewhat apart with a 6.9% loss for the Qual-Gold and a 5.0% loss for the Spec-Gold their market position is very much the same. For both Indices, the Indices have just moved below their moving average lines for the intermediate term and the lines have turned negative. However, their momentum indicators are still in the positive zone so all is not lost. I would rate both as - NEG, just below the NEUTRAL rating. On the long term both are still above their positive moving average lines and their momentum indicators are still in the positive zone so still rated as BULLISH.

As for the actions of the individual component stocks, this can only be thought of as miserable. 100% of the component stocks of the Qual Index closed lower during the week while 93% of the Spec stocks closed lower. For the Qual-Gold Index all three time periods are rated as BEARISH for the summation of individual component ratings. The short term has a bearish 98% rating while the intermediate term has 68% and the long term 52%. For the Spec-Gold Index the long term still has an overall rating of BULLISH 58% but the short and intermediate term are now BEARISH with 78% and 55% respectfully.

MERV'S GAMB-GOLD INDEX

I have separated the Gamb Index from the other two because it seems to be the one that deviates the most from the norm on a weekly basis. This week it declined by 4.2%, the lowest decline of the Merv's indices. Along with that Index decline there were 77% of the component stocks declining, bad but not as bad as the other Indices. As for the summation of individual component ratings, only the short term has gone BEARISH with a 62% rating. The intermediate term is NEUTRAL with neither the bulls nor the bears in control. The long term is still BULLISH with 50%.

As for the chart indicators, the Index is still well above its positive intermediate and long term moving average lines. The momentum indicators are also still well in their positive zones and appear closer to being overbought than being in the negative. For both time periods the Gamb-Gold Index may still be classified as BULLISH.

SILVER

Although silver and silver stocks are included as part of the universe of 160, many like to see it as a separate item so I look at silver separately most of the time, with two dedicated silver Indices.

Although the decline in silver was greater this week than that of gold it still seems to be the better performer over the past intermediate and long term periods. As the chart shows, silver is still well placed within an upward sloping channel and is now heading towards the lower channel trend line. Whether the trend line acts as a support or not remains to be seen. If gold is heading towards its Oct low then maybe so is silver, which would break the support trend line. There is nothing in the silver chart that suggests one should be overly pessimistic about silver, however, there is also nothing there for anyone to be overly optimistic either.

MERV'S QUAL-SILVER INDEX

As with the Qual-Gold Index, the Qual-Silver Index had a bad week losing 6.3% of its value. All component stocks in the Index (all 10 of them) declined on the week. The summation of individual stock ratings is, however, not all that bleak. This summation stands at 75% BEARISH on the short term but BULLISH on both the intermediate and long term with 50% and 70% respectively.

As for the chart indicators, the Index is below is negatively sloping intermediate term moving average line but the momentum indicator is still in the positive zone. From this I would call the intermediate term rating as NEUTRAL. On the long term the Index is still well above its positive sloping moving average line and the momentum is still inside its positive zone for a still BULLISH long term rating.

MERV'S SPEC-SILVER INDEX

The Spec-Silver Index declined by 4.8% during the week with 84% of its component stocks closing lower. The overall summary of individual ratings stand at 66% BEARISH on the short term, NEUTRAL on the intermediate term and 54% BULLISH on the long term.

As for chart indicators, the Index closed the week above both intermediate and long term moving average lines with both lines still pointing upwards. Both momentum indicators are also in their positive zones. From the ratings stand point the Index is still BULLISH for both time periods.

RECOMMENDATION

Who knows, this latest action may be perpetuated just to panic investors into selling off BUT can you afford to lose your capital on that assumption. I go with the trend and that trend is towards the negative. Therefore most speculators should be out or ensuring they have appropriate exit prices to protect their capital in case this trend continues to move lower. Outright gamblers can always find gambles to their liking but they know, or should know, the extra risks they are taking. If the trend should change you can then start rethinking getting back in. The worst you would have done is maybe lost a little in potential profits but that is better than losing actual capital.

MERV'S PRECIOUS METALS INDICES TABLE


Click to open larger image in new window.

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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