We had an upside day on Friday but that was about it. We might get a rally here but there is no indication that a trend reversal is at hand. There seems to be still more down side to come.
GOLD
LONG TERM
Maybe it's time to take another look at the long term P&F chart and see what it is telling us. First, a two or three line tutorial on this chart. The blue lines are support lines and the red lines are resistance. The heavier the line the more important it is. For a reversal we need the plot to go through two previous highs (or lows) AND through the down trend line (or up trend line). That's your P&F tutorial.
During a long term trend there is a technical concept that says the stock (or commodity, or Index) will take a major rest about at its half way mark. We had such a rest period at about the middle of the chart, around the $600 level. Now, the total advance from the start of the trend low to the start of the rest period high was $465 ($720 minus $255). The low during the rest period was $555. If we add this $465 move to the rest period low we get the next half of the trend going to $1020 ($555 plus $465). Viola, that's where we went, the top of the bull. Now, two things about this concept; don't expect the second half to always be as precise as this gold chart and don't always expect a rest period at the half way mark.
There is another interesting feature of this chart, one that highlights the difference between the rest period and the top. During the rest period the bull was broken but the bear really did not go anywhere. The next bull went into new high territory. At the top the bull was broken but the bear went nowhere. A new bull went into effect BUT it too did not go anywhere before turning down into another bear. This inability of the new bull to not be able to move into new highs gives us a bearish double top pattern (not ideal but still a double top). . With the confirmation of the last bear, the bearish double top pattern was also verified. Where to from here?
The initial bear break gave us a projection to the $660 level. The second bear break gave us two projections, to $585 and $645. The double top break gave us a projection to $660. So it looks like the $660 is a very likely target but that the trend could take us a little lower, but within the area of consolidation during that rest period. This is why I think that if we do get a rally from here it will only be a rally and not a basic trend reversal. Those projections should still be met.
As for the normal chart and indicators, that's easy this week. Gold remains below its long term negative moving average line and the long term momentum indicator remains in its negative zone. Both are some distance from a reversal. The long term rating therefore remains BEARISH.
INTERMEDIATE TERM
Once again we see the double top pattern and its breaking in Aug. We note here that the normal chart and indicators DID NOT give us a long term bear market until the 08 Aug 2008 commentary, so the original P&F bear was premature based upon the normal indicators.
As for the intermediate term, things are looking kind of bleak. Gold is below its negative moving average line. The momentum indicator is in its negative zone and made new multi-year lows this past week. Even the volume indicator is seen to be plunging. It is usually a lagging indicator at a top but is coming on steam pretty fast. On the intermediate term the rating can only remain BEARISH.
SHORT TERM
I guess a $100 drop in two weeks was just too much so we had a bounce on Friday. At this time that is all we have although it could develop into a rally. I don't expect it to develop into a trend reversal as we saw in the analysis earlier. Although gold is still below its short term negative moving average line (and its very short term negative line) the momentum indicator has shown some improvement as it has move out of its oversold zone and above its trigger line. This is just a warning of possible improvement. We still need the price to go through its moving average line and more specifically the line to turn upwards. For now the short term is still rated as BEARISH.
As for the direction of least resistance, that is still to the down side although another day of positive action and that might reverse to the up side.
SILVER
From its high in March silver has dropped 50% in price. This, compared to a drop of less than 30% for gold. The decline has almost entirely taken place since early July.
As with gold, any rally from these levels may be seen as just that, a rally not a reversal. Too much damage has been done to the price. For a recovery to take place it should go through a period of consolidation and strength building. We are probably not looking for a real recovery anytime this year although anything could happen. These are just my musings, in the end I let the market action dictate what is happening and go with that. At the present, what is happening is not good.
PRECIOUS METAL STOCKS
We've had another lousy week in the precious metals (gold & silver). The overall universe of 160 stocks declined an average of 9.3% while the more speculative gambling variety of stock declined 10.9%. The highest quality stocks had slightly lesser declines, averaging 4.4%. The silver stocks took the biggest hit again with the quality stocks declining 8.4% and the more speculative stocks declining 12.7%.
If we look at the declines since their highs earlier in the year we find that almost all sectors declined about the same. The 160 universe declined an average 47.2% while the quality stocks declined an average of 41.8%. The gambling variety declined 48.6%. Silver stocks took the biggest hit with the quality stocks declining 53.4% while the speculative stocks declined 52.6%. By the same comparison, i.e. weekly close, gold declined 23.5% and silver declined 47.3%. The magnification factor (stock decline versus commodity decline) for gold is over 2 to 1 while for silver it's almost 1 for 1. Either silver stocks have much more down side to go or the commodity has been overdone on the down side.
One thing this highlights is that the quality stocks DO NOT have any great advantage over the speculative or gambling variety of stocks, on the decline. On the advance there is an enormous difference, to the advantage of the speculative or gambling stocks.
The major Indices had a somewhat better week due to the method used to calculate their Indices. The largest stocks, those with the least movement, have a disproportionate effect on the Index calculation. All of the Merv's Indices are calculated the same way and therefore a comparison between the different Indices is quite valid.
Merv's Precious Metals Indices Table
That's it for this week.
