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November 17, 2005

The Charts Are Talking - Who's Listening
by Douglas V. Gnazzo

"Gold can a path through hosts of warders clear.
And walls of stone more swiftly can displace than ever lightening could."
[Horace]

The Trend

"The trend is your friend," is one of the famous adages of investing. One of the keys to the language of the markets is recognizing primary trends.

The primary trend is the long-term trend of any given market or asset. Its signature is made by the prevailing pattern of highs and lows.

A series of higher highs and higher lows forms a bullish rising stair step pattern.

A series of lower highs and lower lows forms a bearish falling stair step pattern falling.

A Cup And Handle

The cup and handle formation is a long-term chart pattern.

It forms as an intermediate counter-trend correction of the primary trend, and is therefore a continuation pattern. It is also part of a longer term ascending triangle pattern.

The pattern begins with a new peak forming after a strong up-trend.

A counter-trend correction then occurs. The price can fall up to 50-66% from the recent high, although most corrections are not so deep.

The stock then rallies back up and forms a second peak within the vicinity of the first peak.

The stock then corrects in a sideways pattern and can have a slight bias to the upside or downside. This consolidation phase forms the handle.

The handle is completed when the price breaks above the second peak, and eventually the first peak as well.

The handle should form in the upper portion of the cup pattern. It is more powerful if volume contracts as the trough forms, and then expands on the breakout.

Bullish Trends

One of the most bullish primary trends presently occurring is in the gold and silver markets, both in the physical metals, and in the stocks of the companies that mine the metals. Energy and commodities have also been good performers.

These are the three most sound themes or basic trends in the market recently. They are part of a new paradigm out of paper or fiancnial assets, and into real or hard assets.

Technical analysis shows they have been good performers most recently, and fundamental analysis says they should continue to perform well in the immediate future. Only time will tell.

Since the beginning of the recent up-trend, gold has appreciated from a low of $257 to a recent high of $475.50. This represents an increase of approximately 86%.

Gold Market

In the same time frame, the Hui Gold Index (HUI) has gone from approximately 40 to over 240 for a 600% advance.

Many savvy market analysts say that the precious metals are in the early stages of a powerful bull market, and that there is more to come than has occurred.

IF this is true, then there should be a number of cup and handle patterns forming among the precious metal stocks in preparation for the more powerful phase II and III stages of the bull market.

Index Charts

The first two charts we will look at are the XAU and the HUI Indexes. These are indexes of a number of gold and silver mining stocks. The indexes provide a general overall view of the precious metal stocks.

Charts Courtesy of StockCharts.com

The two charts are almost identical. Notice the first peak in the far left hand corner of the chart, which is followed by a correction that forms the bottom of the "cup."

The price then resumes its upward direction to a second high in the upper right hand corner of the chart, near the height of the first high. The first high forms the left side of the rim of the cup. The second high forms the right side of the rim.

The price action then consolidates and moves sideways, oscillating above and below the height of the rim. This price action is the handle formation.

The above two charts clearly show the pattern, however, until the handle breaks out - the pattern is not yet complete, nor confirmed.

Gold Stock Charts

Next are the charts of two individual mining companies. One is Newmont Mining, which is the largest gold mining company in the world. The other is Glamis Gold, one of Canada's premier mining companies.

Charts Courtesy of StockCharts.com

The cup and the handle formation can be clearly seen on these two charts as well. There is no guarantee that the formations will be completed - there never is. But the present chart patterns strongly suggest that a breakout is pending.

Silver Charts

Next, we will look at the charts of two silver mining companies to see if they follow the "pattern." The first is Pan American Silver, and the second is Standard Silver Resources.

Charts Courtesy of StockCharts.com

It is a good omen to see that two of the premier silver stocks are replicating the cup and the handle pattern as well. This lends more support to the likelihood that the patterns are for real, and that they will be confirmed by breakouts to new highs.

South African Miners

Lastly, we will look at two of the South African mining companies. We have left them for last for a reason. The South African Rand has been in an up trend versus the U.S. Dollar. This makes it much harder on the SA's bottom line profits.

The first chart is Gold Fields, and the second is Harmony Mining.

Charts Courtesy of StockCharts.com

Once again the cup and handle patterns are evident in the SA's as well. This bodes well for the precious metals stocks in general, as the South African stocks have been held back by the performance of the Rand.

Conclusion

The precious metals markets have been tough of late. Last week they were forming a wedge patter that looked like it was a perfect set-up for a break out. What did the HUI do - it broke down. Then Friday of last week the precious metal stocks reversed course and broke out of their wedge pattern. Now on Monday and Tuesday they appear to have broken down again

Personally, I don't know which way they are going to break it doesn't really matter. If they break out, I will sell into the strength, and if they break down, I will buy into the weakness. That's what one does in bull markets.

Buy weakness and sell into strength.

The charts of the precious metal stocks are peppered with cup and handle formations that presently appear to be consolidating in the handle portion of their patterns - prior to breaking out to new highs: IF the patterns are completed and confirmed.

The precious metal stocks may well be talking.

Is anyone listening?

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

Douglas V. Gnazzo © 2005-2009
All Rights Reserved Without Prejudice

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