Four up and only one down but still going nowhere. Gold is setting itself up for a move - but which way?
WHO TO TRUST?
Everyone (well, everyone I know) wants to know which way gold is going to move next. The bulls will tell you up and the bears will tell you down. But that's not good enough. You need a reason to be bullish or bearish. So, how do you determine what discipline to use to determine bullishness or bearishness? Unless you are just flipping a coin (and that will give you 50/50 odds), gazing at the stars or reading tea leaves there are two disciplines to determine an answer to the question of "which way?" Fundamental analysis or technical analysis, those are your two ways. For those who may be far more sophisticated, and those who only think they are, there is a third way, fundamental AND technical. There is, of course the political angle to be considered. What happens in the world has often a more profound effect on gold than almost anything else. However, since it is impossible to know what any of a number of our global nut cases is going to do next this angle is just one of the risks inherent in speculation in the precious metals markets.
I am basically a lazy person. In my Aerospace career it was not unusual for me to spend time just trying to think of the simplest and easiest way of solving a problem. Inevitably, the simple/easy way was far less prone to errors than the more sophisticated way, and in aerospace, errors could be real killers. I have the same attitude when applying my talents (such as they are) to the analysis of markets. The technical discipline is simplicity and so I am a technician.
I am not going to go into the pros and cons of the two disciplines. You have probably been subjected to such comparisons often enough. I will say just two things about fundamental analysis and two things about technical analysis and leave it to you to decide which discipline you would use to make your decision as to the direction of gold and precious metals stocks.
Fundamental analysis is difficult and time consuming. You could spend many hours of labor investigating just one company and then you may not have investigated everything. This is why the investment industry pushes fundamental analysis. They know it is usually too difficult and time consuming for the individual and therefore you must rely upon THEIR fundamental analysis and advice. THINK ABOUT IT.
The second thing about fundamental analysis is that, at any given point in time YOU DO NOT KNOW ALL THE FUNDAMENTALS. The important things you may need to know may not be available to you until after the stock has already acted. SOMEONE may know the immediate fundamentals that are important but you don't, at least not yet. Do not kid yourself that in this age of the computer and "instant information" that all the latest and important information is actually available to YOU.
Fundamentals move the market. How often have you heard that statement? Even as a technician I have to accept the basic truth behind that statement. However, as mentioned above, you may not know the important latest fundamentals that those who can move markets may know. The latest stock or commodity price is based upon ALL knowledge about the security at any point in time and is being acted upon by those in the know. This is why technical analysis is so important. Only by a study of the continuing price/volume data can one have the best chance of understanding if the latest fundamentals are bullish or bearish for a security. You may not know what those fundamentals are at the time but you do know their effect upon the security price. And you would go with the money. This is the function of technical analysis.
Of course the second reason I'm a technician is that technical analysis is SIMPLE. It could be very difficult but why make it so if simplicity gives you the same or very, very much the same result.
WOW! I've spent a full page and said very little. Maybe there is a fundamentalist inside this body.
GOLD
LONG TERM
Since last showing the long term P&F chart three weeks ago nothing much has changed as to the position of gold. The chart direction has turned to the up side with two X's but the trend is still bearish and the action still some distance from reversing the bear. We need a move, based upon the present chart, to at least the $675 level before the chart gives us a reversal to the bull so no need to hold your breadth yet in anticipation.
As for the usual simple indicators, the week's action has continued below the long term moving average line and the line continues to slowly turn lower. The action is also below the popular 200 DMA line but in this case the line slope is still slightly upwards. Momentum continues in a basic lateral direction slightly above the neutral line for a still positive reading. As for the volume action, the volume indicator is above a positive moving average line and moving higher.
Other than the volume action, which just could be the leading indicator it is suppose to be, the other indicators are not all that positive yet. Combining these with the bearish P&F I will remain MINUS NEUTRAL (- N) for now.
INTERMEDIATE TERM
Since last shown in the 06 Oct 2006 commentary the intermediate term P&F chart has rallied somewhat and gone into a lateral trend not making any new highs or lows since. We are still under the effects of the bear and need a move to about the $620 level before we can start thinking of a reversal of trend in this intermediate term P&F chart.
Looking at the chart above one can see some interesting features. We are still above a long term up trend line from the previous July low. After a sharp rally and short plunge we have been moving basically sideways. We are trapped inside a triangular pattern which is suppose to be a bullish pattern when following a significant up trend. We'll see.
As for the usual suspects, we are still below a negative sloping intermediate term moving average line although very close to moving above. Price momentum is still in the negative zone but very, very close to moving into the positive. The momentum indicator is showing real weakness behind the price gyrations. Comparing the momentum action during two similar price moves tells us the story. The one month price move from mid-July to mid-Oct of 2005 was accompanied by a significant rise in the momentum indicator, from 46% to 59%. A similar price rise in the past month has barely moved the momentum from 44% to 49%. This is not encouraging. About the only real positive indicator is the volume indicator. It is above its positive moving average line and heading higher, although the daily action is not that hot.
On the intermediate term I must remain BEARISH but am poised to turn on very little additional bullish activity.
SHORT TERM
Still nothing much happening from the short term stand point. For the past month and a half we have been in a lateral trend with no end in sight. If we look at the action since last July, however, each significant move of a few weeks has seen a lower low and lower high. The move on Monday seems to be a one day wonder with the emphasis still to the up side, but not with vigor. Momentum has moved once more into the positive zone after a slight deviation due to the Monday action. However, momentum is still not very strong and more like a neutral indicator at this time. The daily volume action is still pretty low. The cumulative effect, however, suggests more volume being generated on up days than on down days and this is the one continuing encouraging sign.
For now I will stay with a positive trend continuing but it has to go through the previous $606 level to remain so. Otherwise it is likely to test the early Oct low and even the previous June low.
IMMEDIATE TERM
On an immediate basis, the trend is very close to a possible reversal. The aggressive Stochastic Oscillator (SO) is almost at the level from where previous up trends reversed. It is most likely to also reverse after another day or so of upward action. Often, the SO stays inside the overbought zone for some time (see the chart in early July) but that was when the price action was quite strong. This is not the case here. So, best guess assessment is possibly for another day or two on the up side and then some down side action.
NORTH AMERICAN GOLD INDICES
Well, we're back to the S&P/TSX Capped Gold Index from the Toronto Stock Exchange. We see here the continuation of the head and shoulder pattern with a double right shoulder (not that unusual). The weakness in the Oct rally may be viewed by comparison with a similar rally back in late Oct to mid-Nov of last year. That equivalent rally had seen momentum rise to the high 50's level while the present one is barely able to get to the 50% level. The suggestion here is that the present rally does not have the steam to continue for long. It could then breach the H&S neckline for a confirmation of the H&S. Otherwise, the intermediate term indicators are still very slightly in the bearish camp but ready to turn on another day or two upside action. Long term is still a mixed message with the Index below a negative moving average line but the momentum remaining in its positive zone (after a few days flirting with the negative). For now I would watch that developing H&S as the most serious potential. A move above the early Sept high would, however, be a very promising event.
MERV'S PRECIOUS METALS INDICES
Three weeks in a row of upside activity. This is the best we have had since June. However, we are still trapped in a consolidating phase shown in the various Indices charts as a pennant or wedge pattern. Although these patterns are usually bullish patterns when developed after a strong bull move I would still wait for confirmation of such bullishness by their break through the upper down trend line. In all Indices that would cause both intermediate and long term momentum to be comfortable in their positive zones and in all likelihood would cause both moving averages to be on track pointing upwards. The one Index that has already broken through this trend line is the Spec-Silver Index. I will review its positions later in the appropriate section.
Other than the Qual-Silver Index (which has only 10 stocks) all the other Merv's Indices gained within the 2% range during the week. The Qual-Silver gained 4.6%. Looking at the Merv's Composite Index of Precious Metals Indices we see the Index heading towards the apex of a pennant pattern. It is past the mid way point and approaching the 2/3 point. One would like to see the pattern broken on the up side at about the 2/3 point and not much later. Much more beyond that point and the pattern starts to lose its power. The Index closed the week above its intermediate term moving average line with the line turning but not fully reversed. Intermediate term momentum has just moved into the positive zone for an overall bullish reading for this composite. As for the long term, as with almost all of the Indices we have that mixed message. Index below a negating moving average line but momentum continuing in the positive zone. Although in its positive zone, momentum has been basically tracking a lateral trend for a few months now. We need to see it make a new high versus its previous highs since June.
As far as the Composite Index is concerned, I would rate the intermediate term as bullish and the long term as either neutral or plus neutral.
There are times that we will have a significant difference in the position of golf bullion and the position of the gold stock Indices. This is not unusual. When this happens it is usually the stock indices that are the leading indicators with gold bullion to follow after.
MERV'S GOLD & SILVER 160 INDEX
Well, let's see what is happening to the average gold stock in our universe of 160 stocks. Since the May high the Index has developed a well defined downward sloping wedge pattern. As indicated earlier, this is a bullish continuation pattern when formed after a significant bull move, which is what we have. By all accounts this Index should break on the up side and in not too distant future. The Index closed the week above both of its moving average lines, although just barely above the long term line. The intermediate term moving average has now turned up while the long term is still pointing downward. As for momentum, both the intermediate and long term are in their positive zones. From this I would rate the intermediate term as bullish while the long term is not quite there with a plus neutral rating (which is one notch below bullish).
As for the breadth indicators, the weekly advancing and declining issues is about the same as last week with 2/3 of the issues advancing and 1/3 declining. As for the summation of individual rating, they all moved towards the improvement side. The short term is at a BULL 69% (bull 58% last week), the intermediate term is at a NEUTRAL rating with neither a bull or a bear in control (bear 54% last week) and the long term is at a BEAR 57% rating (up from a bear of 67% last week).
Just a note on interpreting some of this information. Although the indicators have the intermediate term as already bullish we still do not have a bullish reading from the overall individual stocks. What this suggests is that those stocks that are already bullish are gaining at a greater % rate than are those that are laggards and therefore having a greater effect on the Index itself. As an example, you could have two stocks, one advancing by 20% and one declining by 10%. As far as the summation of the two it is a wash, one advance minus one decline, but as far as the average performance of these two it is a positive 5%. So what we may be seeing are the advancing issues with better average weekly performances than the weekly decliners.
Although we are seeing many double digit gainers we are still not seeing the excessive speculation. There were no stocks in my arbitrary plus/minus 30% weekly performers category this week.
MERV'S QUAL-GOLD INDEX
MERV'S SPEC-GOLD INDEX
MERV"S GAMB-GOLD INDEX
It's easy to lump these three sectors together this week. All of the charts and technical indicators are the same for all three Indices. All three Indices are either inside a pennant or wedge pattern, which as I've mentioned earlier are bullish continuation patterns. All three Indices are heading towards the upper down trend line of the pattern and with not much more upside, could break through the lines. As for the indicators, all three Indices are above their positively sloping intermediate and long term moving average lines and all three have both momentum indicators in the positive zone. It looks like a concerted message of bullishness. The only hesitation is the weakness of the momentum indicators suggesting that the Index moves have considerably reduced strength behind them versus the strength of previous moves. This weakness is something that is a concern for the trend longevity. It would not be unusual for the trend to reverse direction shortly after giving a bullish signal.
As for the breadth information, the Qual and Spec Indices had better weeks than last week with advancing issues in both Indices well into the 70% level. The Gamb Index was a disappointment with a worse performance than last week with only 53% advancing and 43% declining issues. As for the % of stocks that ended the week bullish or bearish, all except the long term Gamb numbers Improved, but not by much. For the Qual-Gold Index we have short term 78% BULL, intermediate term NEUTRAL with neither bull nor bear in control and long term 52% BEAR. For the Spec-Gold Index we have short term 73% BULL, intermediate term 60% BULL and long term NEUTRAL. For the Gamb-Gold Index we have short term 57% BULL, intermediate term NEUTRAL and long term 53% BEAR. This last figure was the only one that was not an improvement from last week.
At the present time we still have the Qual as the better performer from the short term perspective, the Spec as the better performer from the intermediate term perspective and the Gamb as the better performer from the long term perspective (although the % BULL/BEAR may not quite indicate so).
SILVER
Silver continues to show a better performance than gold but it too leaves a lot to be desired. For the past 5 months the action has basically been neutral. The price is just about where it was 5 months ago. Momentum has been tracing a basic lateral trend hugging that neutral line. Volume has been the one encouragement. It has been in a continuous up trend despite the ups and downs of the price. It is now considerably higher than where it was 5 months ago, or even where it was at the top of the price chart in May. All this suggests accumulation on going under the guise of a neutral market. From this one would expect an eventual explosion to the up side but that is still not being shown on the chart. Let's see what will happen if the price should breach that previous Sept high.
As for the usual indicators, the price is above both its intermediate and long term moving average lines and both lines are now pointing upward. Both momentum indicators are in a 5 month lateral trend with both in their positive zones. Unlike the intermediate term momentum which has been alternating above and below its neutral line, the long term momentum, also tracking a lateral trend but all just above its neutral line in the positive zone. Strictly from the indicators both time periods may be classified as BULLISH.
MERV'S QUAL-SILVER INDEX
The 10 stocks making up the Qual-Silver Index had a good week with an average advance of 4.6%, the best of any of the Indices. There was only one loser in the Index with 9 gainers. There was a significant shift in the ratings this past week but with only 10 stocks in the Index shifts in ratings is quite easy. Short term we are at 85%, intermediate term at 65% and long term at 60%, all BULLS.
The chart of this Index shows a flag pattern, the only flag in the bunch. It has the same implication as the pennant or wedge. The Index is above both positive sloping moving average lines with momentum indicators that are in their positive zones. This Index may be rated as BULLISH for both the intermediate and long term.
MERV'S SPEC-SILVER INDEX
The Spec-Silver Index was the best performer on the way up and along with Gamb-Gold the poorest performer on the way down. This week's gain of only 2.0% was the poorest performance of any of the Merv's Indices or the major North American Indices. It had a few good winners but also some bummers. As for breadth, only 56% of the component stocks advanced and 40% declined. Despite this there was a decent shift in the overall ratings towards the positive. On the short term we are 68% BULL, on the intermediate term 52% BULL and the long term NEUTRAL. All these are improvements from last week.
Looking at the chart one notices that this is the only Merv's Index where the Index has broken through the upper down trend line of its wedge pattern. This is a bullish event but one that should still be taken with some caution. I would be far more encouraged once the Index closes above the early Sept high (this comment goes for all of the Indices). Both momentum indicators have moved into the positive zone (the long term has been there for ages) and the intermediate term moving average line has been breached by the Index, with the line turning up. Only the long term moving average is still a problem. The Index is still below the long term average and the moving average is still pointing downward. This may change in the next week or two if the upside action continues.
This Index may be rated as BULLISH for the intermediate term and NEUTRAL for the long term.
RECOMMENDATION
It's just about time to start thinking on the buy side. The environment is getting better and better but still overly risky. The greatest threat to continued bullishness in the stocks is that damn momentum. With such a weak momentum in all sectors one must be prepared that the bull trend of recent weeks may not last. Weak momentum does not always mean an eventual downside market, It just raises the risk of that happening. For the market to continue higher for any length of time one would like to see this strength in the price action improving.
Although the speculative stocks are still not the major movers yet, they will move if the market continues on its bullish way. So, this week in the Individual Stock Review section I have shown 6 speculative stocks that either have started their moves or are on the verge of doing so. Remember, it is still a risky period so one must understand the risk and have the stop loss prices on hand to protect capital from surprises, but keep them as mental stop losses and act if the stock should close at or below the price.
MERV'S PRECIOUS METALS INDICES TABLE
Click to open larger image in new window.
That's it for this week.
