Technically Precious with Merv

By: Merv Burak | Sun, Jan 14, 2007
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Commentators have declared that investors were picking up "bargains" this week, lifting the markets towards weekly gains. What "bargains"? Bargains are known only after some period of time. "Bargain" hunters may only be jumping the gun prior to even better "bargains" ahead.

"Investing" versus "Speculating"

A few weeks back I mentioned that I would say a few words about investing versus speculating. What are YOU doing? Are you an investor or a speculator in the market (I'll forgo the mention of gambling today, leave it for a later day)? Most would say they are investors. But are they REALLY?

The "old" definition of an investor (such as during my youth in the '50s) was one who bought good solid government bonds and put them away for their retirement, accumulating dividends in the process. Speculators were those who bought shares of corporations. In this day and age of rapid market and interest rate changes I'm not sure what the definitions are any more. Over the years bond "investors" were big losers in the market. Speculators in stocks were the big winners. What good is it to be an upstanding investor if you are going to lose your shirt?

I am inclined to turn the definitions on their head and consider the real investor as one who buys stock in ANY corporation after a review of the stocks trading activity and follow such activity. When such activity turns around this investor would get out and move on to the next mover. This is minimum risk and maximum gains type of investing without too much concern for the "quality" of the company. Sure, you are going to lose sometimes BUT by keeping track of the trading activity you limit your losses and not hold for dear life expecting things will get better. If things get better you are back in because you have cash to do so.

By limiting losses and maximizing gains, THAT is the real investor. However, the industry calls this kind of individual a speculator or even worse, a gambler.

The example I like to give as the difference between an "investor" and a "speculator" is the example of two men, each with money to place in the market. The first man buys "quality" stocks or bonds expecting to make 15% per year on his investment. A year later he ends up with a gain of 15% and considers that successful investing. The second man speculates with his money. He is expecting to make at least 100% on his money over the year. He buys and sells as the trading activity requires. In the end he had a few losers and only made 80% on his money He is considered a failure for failing in his objective. Which would you rather be, the successful investor or the failed speculator?

I could expand this commentary but I'll leave it here for you to think about it for a while.

GOLD

LONG TERM

The long term P&F chart hasn't moved from last week despite some great moves in gold during the week. Last week's analysis remains unchanged Re: the long term P&F chart.

Looking at the normal long term indicators on a daily chart one is sometimes surprised how slowly things change from the long term perspective. A week ago the price of gold dropped sharply through its long term moving average line. This week it moved just as sharply above the line (both times on the Friday action). The line is still slightly bent downward BUT over the past 4 months the line has basically traced a lateral path, sometimes slightly sloping upwards and at other times slightly pointing downwards. I am considering the moving average line slope as neutral until a more definite direction has been verified. That would require a more concerted new trend in the price of gold and not this meandering it has been doing for the past several months.

Back in early Oct the long term momentum indicator (150 day RSI on the daily chart) just touched its neutral line but stayed above. It has since moved somewhat above the line but not too far above. It has remained in the positive zone but within a narrow band. It has stayed above the neutral level (50%) but below the 55% level for 5 months now. That is a + neutral type of action, still positive but barely so. It has a long way to go to get overbought (the 70% level). Both the price action and momentum action are more of a holding pattern activity rather than a bullish or bearish trend. Which way it will finally go is still an unknown (although the P&F remains bearish). Looking at the volume activity to see which way the speculators are placing their bets gives us an uncomfortable felling at this time. The volume indicator continues to move lower and is at the level it was at during the June low. The indicator is still below its long term trigger line and the line has definitely turned down.

I turned BEARISH after the Friday plunge a week ago and will remain bearish despite this Friday's action. There just isn't enough enthusiastic upside action to change.

INTERMEDIATE TERM

The intermediate term daily chart above clearly shows the lateral trend over the past several months. Following its initial plunge in May/June and the rally in June/July gold has stayed within those two boundaries ever since, i.e. above the June low but below the July high. In fact the action has traced a reverse megaphone pattern. I'm not sure if this is supposed to be a bullish or bearish pattern. I will go with my indicators. We see the tight lateral trend in the intermediate term momentum. It just can't seem to get any strength behind any move lately. The volume indicator is interesting. It has been slightly positive since its May top, making a higher high in Aug and Nov. However, over the past few weeks it has quickly dropped to its support line from the June low. The little bounce this week looks almost pathetic but we do not know the volume action on Friday. The volume indicator remains below its trigger line and the trigger line is in a downward slope.

Having gone BEARISH last week I see no reason yet to reverse back to the positive so, bearish for another week.

SHORT TERM

Short term we may be starting a rally but the strength of the move, despite the $ advance on Friday, is not encouraging. I mentioned some time ago that I expected a lateral trend for a while and that's what we have. Short term the price goes up and down over a period of a few weeks but stays within that reverse megaphone pattern. I don't see it breaking one way or the other yet, at least the indicators do not show strength that would do it on the up side. The price has moved above its short term moving average line and although it's difficult to see, the line has turned up on the upside move. Short term momentum is also just inching above its neutral line into the positive. We have a short term rally on the move but its longevity is suspect. It could move up to the upper resistance line but I sort of doubt it. So, on the short term the rally continues but is unimpressive.

IMMEDIATE TERM

Where is my coin? I need to flip and see which way the week will start. No one can complain we are not scientific here. For a 50/50 guess a coin flip is as good as anything. But let's also see if the chart is telling us anything that might give us a clue about Monday's and Tuesday's action.

An on-going rally with the price above its very short term positive sloping moving average line. A Stochastic Oscillator moving higher and already inside the positive zone. What more do we need? Assuming the trend in motion will continue, Monday should see a positive trend.

NORTH AMERICAN GOLD INDICES

I think I might have lost the rotating process but am going with the PHLX Gold and Silver Sector Index this week as the major Index to take a look at. The chart shows an interesting channel that dates back to before the May top, to the very beginning of 2006. Except for that brief surge to the May top all the action since the beginning of 2006 has been trapped within this channel. The upper and lower trend lines of the channel have been touched on several occasions confirming the validity of the channel. Now, the only question is "how much longer will the action remain in the channel?'

The indicators are not much help here so we may have to rely more upon trend than indicators. Both, however, can be looked at as lateral with a minor negative bias. So, that's the way I'm looking at it until verified otherwise.

MERV'S VENTURE 150 INDEX

A couple of weeks ago I presented the 2006 yearly performances for various Merv's and North American Indices. The North American Index which is considered the Index representing the speculative segment of the market is acknowledged to be the S&P/TSX Venture Composite Index. It includes over 400 small and speculative stocks from almost all industry groups, resource to technology. Its performance for the year 2006 (up 33.6%) was one of the best as far as major market Indices were concerned (but not nearly the performances of the Merv's Indices). I though I'd develop my own Venture Index. I took the top 150 stocks from the S&P/TSX Venture Composite Index as a start. This was based upon market capitalization using the year end closing prices. I then deleted those stocks that had insufficient historical or sporadic trading data (I require at a minimum one year of active trading for my tables). These were replaced by more speculative stocks from the next 100 stocks on the market capitalization list. Stocks from the bottom 150 plus list were not included. The resulting Merv's Venture 150 Index is shown in the chart. It's interesting to note that for the year 2006 this Merv's Venture 150 Index gained 107.7%, more than 3 times that of the S&P/TSX Venture Composite Index itself. The Merv's Index represents the AVERAGE gain of each of the 150 representative stocks in the Index not the BEST performance of the top one or two stocks. Not bad for an average of 150 stocks.

Thinking about that topic of investing versus speculating, let's see now, Dow up 16.3%, S&P 500 up 13.6%, Merv's Venture 150 Index up 107.7%. Hmmmmm! One should not speculate. Might get a loser.

What am I going to do with this Index (and table of technical information and ratings)? I'm not sure yet but it is interesting. What about those really speculative, bottom of the barrel, 150 stocks in the S&P/TSX Venture Composite Index? Maybe I'll see how their performance would have been but that's for another day. For now this is just something us technicians do for entertainment.

MERV'S PRECIOUS METALS INDICES

It was another decent week for the precious metals and precious metals indices. All of the major North American Indices closed higher as did all of the Merv's Indices. It's only when we get into the lesser Indices and the FTSE Indices that there were some negatives. The Composite Index closed slightly higher but is still below its negatively sloping moving average line. The intermediate term momentum is just on the neutral line and barely budging. All in all the overall precious metals look to be more weaker than stronger and much more upside is required to reverse that.

MERV'S GOLD & SILVER 160 INDEX

The overall gain of the 160 universe was a lousy 1.9%. Actually, that would not be so lousy if it happened every week. We would then have a yearly gain of 213%, my how 1.9% adds up. This is one way many market letters give their performance figures, as an equivalent yearly gain when they only held a stock for a few weeks before selling at a small gain. I guess I should be happy for small gains. Those losses will come again.

Nothing much has changed during the week as far as the indicators go. On the overall individual stock ratings side things also are little changed except that the long term rating has dropped from a minor BULL of 52% to a NEUTRAL rating. With only 59% of the component stocks gaining on the week, that is not much comfort. We'll have to see if this minor gain continues into this week or not. Things still look too weak for comfort.

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

The three sector Indices had a varying degree of performance this past week. The Gamb-Gold index had a reasonable gain of 4.1% while the Spec-Gold had an even lousier than the universe 0.9% gain. The Qual-Gold was somewhere in between. The poor performance of the Spec-Gold Index was due to less component stocks advancing and a few double digit losers on the loss side. The individual overall stock ratings have improved a little with the Gamb-Gold improving the most. The Qual and Spec Indices are still below their intermediate term moving average lines while the Gamb-Gold Index remains above its line. Otherwise, nothing much has changed this past week.

SILVER

Silver once more had a better week than gold with a gain of 5.3% versus gold's 3.3% gain. Silver seems trapped in a wide slightly up trending channel and is closer to the bottom end than the top. One might say that there is more upside potential than down side potential but the other side of the coin is a possible further down side to bounce off the trend line. Although technicians love these channels one of the sad facts is that by time you have two lows and two highs to be able to draw and confirm a channel, that os often the end of the channel action. Very often the next move towards one or the other of the channel trend lines results in a break through such line rather than a bounce off the line. So, we'll just have to see if the channel continues to hold or if there is coming a channel break.

A similar very slight up trending channel can be seen in the momentum indicator. The most notable feature of the momentum indicator is, however, the narrow band of the channel. This continues to suggest a lateral strength trend which needs to be breached for any sustained move to take hold. More watching and waiting.

MERV'S QUAL-SILVER INDEX

This best long term rated Index continues to move higher but at a muted pace with a minor 0.7% gain. It is losing its high rating fast with such performance. Seven out of the ten stocks gained a little during the week but what good is that when one of the losers does a double digit loss nullifying most of the minor gains. As one expects from such a minor weekly gain the overall individual stock ratings are little changed from last week.

MERV'S SPEC-SILVER INDEX

The Spec-Silver had an equal performance to the Gamb-Gold Index, at 4.1% gain. This is still less than silver itself which gained 5.3% on the week. Where is that magnification effect one expects in the stock performance? The week's advance still looks labored and within a potential top activity. The next few weeks should tell us better as to which way next for the Spec-Silver, and the other Indices.

MERV'S PRECIOUS METALS INDICES


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Let's call it a 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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