GOLD

LONG TERM

First, looking at our long term P&F chart (shown last week) there has been no new action to speak of. We are still in a long term bear (according to this P&F chart) and still need a move to the $690 level to get out of the bear and into a bull.

As for the bar or candlestick chart, that's a different story. I've been asked why I always seem to show a candlestick chart rather than the more common bar chart. First, with a rectangular box indicating the daily or weekly action we can show a more beautiful picture, as opposed to a straight line as in a bar chart. More importantly, one can visualize the daily action much clearer by looking at the candlestick chart than the bar chart. The color of the box, whether the color fills the box or only the outline, the length of the box versus the total length of the candle, all these quickly tell a story. To candlestick aficionados just one or two days of candlesticks can tell them a story of what's happening. Also, since the candlestick originated in the east (no, not New York, the real east, Asia) it has a somewhat mysterious quality to it. Go with the image I am told. Few people really understand the substance anyway.

Before getting into the normal indicators, you will notice the triangular pattern shown on the chart. Triangular patterns are most often associated with continuation activity, i.e. the trend is expected to continue in its previous direction on breaking out of the triangle. This is very often true BUT there are some pitfalls to these charts, or their interpretations. Where the up trend and down trend lines meet is called the apex point. The start of each trend line creates what is sometimes referred to as a base (although there are different interpretations of what constitutes a base). I find these patterns work best when the break-out from the pattern occurs about two thirds of the way from the base to the apex. The closer the action moves towards the apex the more likely the triangular pattern will not provide a good technical scenario. Unfortunately, that is where we are at with this pattern. It could still break on the up side but most likely it will move laterally or lower.

As for the usual suspects, the price action continues above a positively sloping moving average line and the price momentum continue in the positive zone. All is still right with the world, according to these indicators. As for the volume indicator, it is confirming the message of these two. The normal indicators are still telling us we are still in a long term bull market.

Putting the P&F together with the normal indicators we continue with that mixed message we have had for weeks. Because of this mixed message I will continue with my NEUTRAL stand until a clearer picture is provided between these two methods.

INTERMEDIATE TERM

Here too the P&F chart has not provided any new message versus the message of last week or the week before. Unlike the long term chart, this chart has us still in a bull market going back to the start in 2001. It just shows you the different message one can get from these charts by changing the unit prices and/or the unit reversal criteria. One can see why even technicians may not always be in agreement on the status of the market even if they have the same data. It's in how you show such data.

The triangular pattern mentioned earlier can be seen here also. Once the price starts to meander up and down, undecided as to which way it wants to go, that's a time when technicians start pulling their hair. Inevitably, the moving average, one of our most important indicators, ends up in a basic lateral trend turning up and down to the tune of the stock motion. We get a positive reading one week and a negative one the next, followed by another positive one. When this happens one must then go to other indicators or techniques that filter out such action. Patterns (when we have them) do quite well at such times. P&F charts are a very good alternative also as they filter out minor price movements and only show major direction moves per whatever the unit/reversal criteria we assign it. Despite the still bullishness of the P&F chart the candlestick chart seems to be saying something different. The moving average line, although in a sideways trend, is weak and more in a downward bias. Momentum is also positive but looking very weak. As for the volume indicator, although it is still positive the daily action is no great shakes. When I put all of this together I get a very bad feeling about the next few weeks. Strictly speaking I should be positive on the intermediate term but today I just can't get myself to believe it. For this week I am going to the NEUTRAL position and see what happens this week.

SHORT TERM

I haven't been mentioning the short term P&F chart lately. The recent price action has been quite volatile and the short term P&F chart has become very difficult to assess but it seems like we do have a bearish short term action on the P&F with a projection to $617. That doesn't sound like much but it would break many of our supports and trend lines to further provide bearish indicators for the other time periods. So, once more it is something to remember.

As for what the chart is telling us about the short term position of the market right now, it's a trapped market, trapped in that triangular pattern. As far as trend is concerned it is either positive (above the up trend line) or negative (below the down trend line), take your pick. The price has dropped below its short term moving average line and the line has once more turned down, but as mentioned, we are in a yo-yo type of situation until the price decides which way it wants to move. Short term momentum has just dropped below the 50% neutral line (49.84% but still below 50%) and has broken below its intermediate term up trend line for a negative strength reading. Daily volume action continues to be very low and not helping.

All in all I would say we are now once more in a BEARISH short term position, and getting weaker.

IMMEDIATE TERM

Well, we know (or at least have guessed) what the short term position is. Now, what do we see as the future of the next few days?

We seem to have all the indications of a short term topping pattern that has already gone over the hill. The recent price continues to make lower daily lows and is below its very short term negatively sloping moving average line. The aggressive Stochastic Oscillator had moved into its overbought zone and quickly reversed. It is now heading lower and has broken below its trigger line.

If I was a betting man I would be inclined to bet that the next few days are going to be on the down side. The triangular pattern will not work and the price will break below the up trend line. The initial support should be at the $600 level but it is quite likely to continue to the previous lows. That is if I was a betting man.

NORTH AMERICAN GOLD INDICES

As you can see it is time to look in on the AMEX Gold BUGS Index (HUI) this week. Some of the major Indices (I call the two AMEX, the PHLX and the S&P/TSX Indices the majors as these are the primary Indices that probably 99% of gold investors look at) are showing a head and shoulder topping pattern. The HUI is one of them. The right shoulder may be sloping a little but this is not unusual. What I find to be the most telling and the best confirmation that we have a H&S pattern is from the action of the price momentum (strength) indicator. The negative divergence at the head (H) and a further weakening at the right shoulder suggests that there is very little strength for any upside moves. The strength has been turning to the down side. Of course for confirmation of a H&S pattern we must break below the neckline which is still some distance away. Should the neckline be breached the move would then project to below the May 2005 low, to about the 140 level. That would be quite a drop, a 65% bear. Will it happen? Who knows? The best thing to do is to follow the actions as they take place and go with the trend. Should the trend reverse, then we will reverse.

MERV'S PRECIOUS METALS INDICES

Looking at my Composite Index of Precious Metals Indices I see a similar H&S pattern on that Index except that the right shoulder slope is to the up side rather than the down side. No big difference, however. Should the neckline be broken the projection would not be as bad as the HUI suggested, with only a 40% bear move total. This Composite Index, representing some 20 different gold and silver Indices as well as 2 metals and the US$, can still be classified as BULLISH for both the intermediate term and long term. The intermediate term is iffy, however. Although the Index is above its moving average line it is not mush above, and the line is still slightly negative in slope. Intermediate term momentum is also just barely above its neutral line and appears to be heading lower. It would not be a surprise if the intermediate term should go bearish in a very short time. The long term is still okay with everything positive.

All North American Indices declined on the week between 1.0% and 3.7%. Only the Merv's Spec-Silver advanced, with a 1.6% gain on the week. We'll look in on that Index later.

MERV'S GOLD & SILVER 160 INDEX

The average of the universe of 160 stocks declined on the week by 2.1%. This was about average of declines for all the Indices in the Precious Metals Indices Table. The overall market has been pretty weak but not in a panic kind of way. With 71% of the component stocks declining and only 24% advancing one might have expected a much more heftier decline in the Index. This just shows that most declines were of a minor nature, no plunge or anything like that. Another point that suggests a mild market action is the fact that, again, there have been no stocks in my arbitrary plus/minus 30% weekly move category. Further, there was only one stock in the plus/minus 20% category and that was a minus. Lastly, as far as market breadth is concerned, we look at the overall component ratings during the week. On the short term the overall rating drops to a NEUTRAL rating with neither the bull nor the bear having more than a 50% rating. This is a severe drop from last week's bullish 73% rating. On the intermediate term the overall rating has also dropped to a NEUTRAL level from a bullish 55% last week. For the long term the overall rating has deteriorated to a BEARISH 52% from a neutral rating last week.

Looking at the chart we see an Index that is not displaying the H&S pattern that some of the majors are displaying. We have a more normal reaction after a long advance and now a consolidation trend. The Index is still slightly above its intermediate term moving average line. The line, although in the process of turning up, has not yet reversed its negative direction. Momentum is just above its neutral line but not showing any strength to speak of. It even looks to be turning and heading lower. All in all, intermediate term may be classified as very, very weakly BULLISH and possibly more into the NEUTRAL camp.

The Index is above its positively sloping long term moving average line for a still positive reading. The long term momentum indicator is still comfortably inside its positive zone with no sign of a reversal any time very soon. From the long term stand point we are still in a BULLISH market.

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

I'm still lumping these three sectors in the one overall analysis but may have to go back to individual commentary should things heat up one way or the other.

Looking over the charts of these three sectors I get Index ratings that differ slightly from those in the Precious Metals Index Table. The difference can be pin pointed to the fact that I use a different momentum indicator for my chart analysis and I use a 40 WMAw for the long term moving average line in my chart versus a 30 WMAw line in the table. Usually the two, my chart analysis and the table ratings, are the same during established trends but they will differ at junction points when the trends may be in flux and in the process of possibly changing. At such points minor differences in moving average or momentum values could change a position from positive to negative or vise versa.

In summary I have a POS rating for the three Indices for the long term while only the Qual-Gold Index has a POS rating for the intermediate term. The other two Indices have a + N rating for the intermediate term.

As for the overall component ratings for the various time periods, they are as follows:

For the Qual-Gold sector, short term NEUTRAL (last week 83% BULL), intermediate term BULL 55% (last week 70% BULL) and long term NEUTRAL (last week also NEUTRAL).

For the Spec-Gold sector, short term 57% BEAR (last week 80% BULL), intermediate term NEUTRAL (last week 63% BULL) and long term 50% BEAR (last week NEUTRAL).

For the Gamb-Gold sector, short term NEUTRAL (last week 77% BULL), intermediate term NEUTRAL (last week also NEUTRAL) and long term 68% BEAR (last week 55% BEAR).

As we can see, all the ratings have moved into or more bearish than last week. Not a trend one wants to see for long.

MERV'S SILVER INDICES

We have an interesting FAN Principle trend lines shown on the chart. This is an example of a BULLISH decelerating FAN but it has a quirk that I don't recall seeing before. The first FAN is drawn through the top at around the $13 level. The second FAN is drawn lower down through the top just below the $12 level. However, this third FAN is drawn through a top that is already considerably higher than this last top. Usually the third top is once more at a lower level than the second top, or at the most, at about the same level. What this means we will just have to wait and see. As old time readers of these commentaries will recall, the normal interpretation of these FANS is that the breaking of the first FAN is usually insignificant while the breaking of the second FAN suggests a trend reversal and the breaking of the third FAN confirms such reversal. Let's see how this works itself out.

MERV'S QUAL-SILVER INDEX

The 10 stocks that make up the Qual-Silver Index continue to act positively during this latest rally, despite a set-back this past week. Even with the 2.9% decline this past week the Index is still above its intermediate and long term moving average lines, and both lines are pointing upward. Long term and intermediate term momentum indicators are positive in both cases. The Index rating, looking at the chart, is POS for both time periods.

MERV'S SPEC-SILVER INDEX

With 3 double digit advancers during the week the Spec Index was our only gainer with a 1.6% advance. Despite the advance nothing much has changed with the speculative Index. The Index is still above both of its moving average lines but the slope of the moving averages differ. The intermediate term line is negative while the long term line is positive. In both time periods the momentum is positive but sloping in a downward direction. This results in POS rating for the long term and a +N rating for the intermediate term.

Fun with Numbers

Every now and then I like to have fun with numbers, numbers that make me look good (you don't think I would make me look bad, do you). These are usually highlighting the performances of my various Indices over time. Let's see how they performed THIS YEAR, i.e. since the end of 2005.

First, we need a comparison to use. These will be the two most popular major Indices, the PHLX Gold/Silver Sector Index (XAU) and the AMEX Gold BUGS Index (HUI).

For the year to date the XAU has gained 11.1% and is down 17.2% from its high a few months back.

For the year to date the HUI has gained 19.5% and is down 17.6% from its high a few months back.

Now for the Various Merv's Indices:

For the year to date the universe of 160 has gained 41.4% and is down 19.3% from its high a few months back.

For the year to date the Qual-Gold has gained 21.6% and is down 12.7% from its high a few months back.

For the year to date the Spec-Gold has gained 26.6% and is down 14.4% from its high a few months back.

For the year to date the Gamb-Gold has gained 87.6% and is down 19.3% from its high a few months back.

For the year to date the Qual-Silver has gained 41.2% and is down 15.3% from its high a few months back.

For the year to date the Spec-Silver has gained 75.0% and is down 21.3% from its high a few months back.

What is most impressive is that the Merv's Indices performance is an AVERAGE performance of ALL of the Index component stocks, not just a few heavily weighted ones.

This continues to highlight one of my views of the gold stock market. Over any bull period one will get a better performance from the more speculative stocks than from the more "quality" stocks. In addition, the overall risk, over time, is not significantly greater with the more speculative stocks than with the "quality" ones. This is even truer when one buys with the trend and gets out when the trend is over. AND, of course, the best way to understand the trend is with an understanding of the technical market discipline.

Buy, Buy, Buy -- NO, NO, NO

During periods of uncertainty, such as we are in now, many inexperienced speculators start to get nervous, not about getting out or staying out of the market but nervous that they are not GETTING IN. These inexperienced speculators continue to want to BUY SOMETHING with the thought that they MUST BE IN the market at all times.

I have held back recommending stocks to buy for some time now due to the uncertainty of the market. Yes, I have provided a very few gambling buys but these were known gambles. My philosophy continues to be to hold off on most purchases until the time is right and the RISKS are greatly reduced. In general, when that time comes it will be from a much lower level than most analysts would have been recommending and one would be buying more stock at a lower cost. But the thing is timing, timing to reduce RISK and timing to gain the maximum on the speculative $. I am still holding off as the uncertainty still overweighs potentials. When the time comes, I will be recommending and jumping in full bore.

MERV'S PRECIOUS METALS INDICES TABLE

Click to open larger image in new window

It seems I got a little long winded this week so I guess I'd better end it here for another week.