The analysis presented is the view of a pure market technician. There is no attempt to present any fundamental data or information as this is not the expertise of the analyst.

A new closing high but not an inter-day high. Three weeks now and gold is having trouble breaking through that $479 high. Maybe this week.

GOLD

It’s always instructive to look at more than one chart. Over time I usually show different charts of gold, from three different perspectives, usually time oriented. However, even looking at different charts for the same time period can be instructive. A few weeks ago I showed a long term P&F chart. This week I show a weekly bar chart for the same period, from the top in 1996 to the present. The bar chart is superior when one wants to see what’s happening week after week. The P&F chart is superior, in my view, when one is most interested only in understanding the overall trend. During 1999/2000 we might have been inclined to get all bullish, what with that sharp rise in price and the moving average turning up with a long term momentum going positive. However, the P&F kept us from losing our head and did not go bullish, long term, till 2 years later.

We seem to be off and running again. New bull market highs with the volume indicator going through the roof for confirmation (I like it when volume confirms on the up side but am always cautious placing too much emphasis on volume on a top reversal occurrence. Long term, volume is a lagging indicator at tops). Momentum is still lagging the action suggesting that the internal strength behind this latest move may not be all that strong. Requires close watching.

For now, I remain BULLISH on the long term

Back in the 1960’s there was a popular investment book called “How I Made $2,000,000 in the Stock Market” written by a dancer called Nicolas Darvas. I think he probably made more money with his book. Because he was well known the book was a best seller. Here, in a few seconds you will get the basic technique for making stock market profits.

Buy on a “box” break-out. Sell on a “box” break down.

There you have it. I just saved you hours of trying to find the book and more than a few bucks to buy it. But what in the world is a “box”. That is when you have a horizontal (lateral) trend with a resistance at the top and support at the bottom.

There is technical background to his technique. All technicians look for break-outs as places to buy, or for the more aggressive, places to confirm the trend. The concept works very well, if you are in a bull market. In a bear market, upside breaks are often false ones. Technicians using P&F charts are great ones for following this technique. They just use a different kind of chart.

Getting back to gold, we have a “box” pattern formed over the past month with a break-out at $480 and a break-down at $460. But the “box” is not very solid yet. The intermediate term P&F is still far from any kind of reversal situation. Maybe we will see a clearer reversal potential in the short term P&FM but that will come later. For now, P&F wise, there is no danger of a reversal yet.

As for the usual indicators, the price is well above the moving average line and the line is moving sharply higher. Price momentum is positive but showing weakness versus price action. Volume indicator is also positive but not enthusiastically so.

All in all, I am still BULLISH on the intermediate term.

NORTH AMERICAN GOLD INDICES
and the MERV’S GOLD INDICES

Space limitations do not permit me to show all the Indices in one commentary but I show one or two each week. However, I wanted to comment this week on the performances of gold and the various Indices from the top of the previous gold bull market to the present, i.e. from 1996 to the present. In particular are my views as to which are the most representative Indices from the standpoint of the gold stock investor. All charts discussed are available in this week’s subscribers section of Merv’s Precious Metals Central. There are many free chart services on the internet where one might obtain charts of the major Indices. Discussed in this section for performance comparisons will be gold, the two most common major North American gold indices (AMEX Gold BUGS Index and PHLX Gold/Silver sector Index) and the various Merv’s Indices.

First, gold itself is well above the previous bull market high and quickly closing in on the late 1987 high of $502. That is not the case with the PHLX Index. It is barely half way back to its 1996 highs. The AMEX Gold BUGS Index is a little better being just barely above its 1996 highs. So much for the major Indices.

The performance of the Merv’s Indices is something else. Merv’s Qual-Gold Index, the closest thing to the major Indices, is about 50% above its 1996 peak. With the other Merv’s Indices it’s like being in another world. The overall Merv’s Gold & Silver 160 Index is almost exactly 10 times its 1996 peak price. The Merv’s Spec-Gold Index is more than 4.5 times its 1996 peak. Although we do not have 1996 data for Merv’s Gamb-Gold Index looking at the performance since 2000 and comparing it with the Merv’s Spec-Gold Index the performance numbers for the Gamb-Gold Index would be in the same order as the Spec-Gold Index. So, what does all this mean?

My first conclusion was that the major North American Indices are not providing you with a true picture as to the performance of the average group of stocks the Indices are supposed to reflect. They, instead, provide you with the performance of the two or three most heavily weighted stocks in the Index regardless of how many total stocks there are in the Index. There may be many good performing stocks in these Indices but you would not know this if these stocks are at the bottom of the weighting scale.

The next thing that is obvious is that the major Indices do not reflect “the industry”. They are developed to reflect only the major few large companies in the industry but not the hundreds of smaller companies. I believe that my Merv’s Gold & Silver 160 Index far better reflects what’s happening in the industry in general rather than a few major companies.

A review of the Merv’s Indices shows the difference between the spectacular performance of the stocks NOT classified as “quality” and those that ARE classified as “quality”. On the up side the difference is enormous but what about the down side? How often have you heard that you should “buy quality and hold for the long term”? Well, quality has not done you any favors. On the down side, from the top in 1996 to the final lows the average “quality” issue dropped 69% (Merv’s Qual-Gold Index) while the average of the 160 universe dropped 68% (Merv’s Gold & Silver 160 Index). How did the majors do? Well the AMEX Gold BUGS Index dropped 84% while the PHLX Gold/Silver Sector Index dropped 74%. And what about the speculative stock? They dropped 80% in the same period (Merv’s Spec-Gold Index). Where, oh where is this “safety” in the “quality” stocks?

I don’t mean to bash the quality stocks (well, maybe I do) but so much money has been lost by investors investing in “quality” stocks and holding for the long term while investing (or speculating) in the less than quality gets a bum rap that occasionally the speculator has to speak out against the political correctness of the industry.

Don’t get me wrong. You can lose EVERYTHING in many speculative stocks by buying and holding. The secret to making money in the gold stocks is not to buy and hold but to buy and sell. One should already have a sell price in one’s head BEFORE buying any stock. Then, if an error of judgment had been made one gets out FAST with a minimal loss and go on to the next speculation. This stop loss price can be continually upgraded as a stock may rise so that when the turn comes one is out NEAR the top and not holding all the way down. This is the secret to playing the gold stocks, quality or speculative or gambling. So, what is this thirst for quality in gold stocks?

I like to tell the old story about the two “investors” (many of you might already have read it but many may not). The first investor was a conservative investor. He did not speculate. He would buy good quality stocks and hold for the long term. His goal was to make 20% in the year and he would be very happy. The first year he made it and was happy. Now the second investor liked to speculate. He knew stocks go up and down and were risky so he would invest in the more speculative stocks and use stop loss points to protect against major losses. His goal was for 100% profits in a year. Over the course of the year he had some winners AND he had some losers. After a year this poor fellow did not reach his goal. He only made 80% and was sad. Which would you rather be? Which kind of investor do you think would survive the inevitable bear market when it comes?

FUTURES COMMENTARY

METALS

Gold: Boxed in between $461 and $479 and needs to get out of the box. Whichever way is the next direction and it looks like it might be to the up side.

Silver: Low volume action makes the rally since the end of Aug look suspect. The upside break on Friday may end up to be the reverse of the downside break of a month ago. Go with the trend but be prepared to exit if things turn around.

Palladium: If only the volume action would improve we might have a good rally in progress.

Platinum: New highs, poor volume and momentum action. Rally looks weak but who knows, stranger things have happened then a rally on low volume.

Copper: Steady upside action for three weeks propelling price into new highs. Momentum, however, still has a little way to go and volume is seriously lacking. Where, oh where are the speculators to give us that volume thrust to go with the price?

ENERGY

West Texas Light Sweet Crude: Downside break and heading towards $54 but not all in one continuous plunge. There will be rest periods along the way.

Natural Gas: The turn has come. NG has broken below that third accelerating FAN trend line, you know the one, the “blow-off” one. Now we can look forward to lower values or at the least, a sideways trend. New highs are unlikely for now.

Heating Oil: Touched the third decelerating FAN trend line and bounced, but just a little. Most likely a downside break will occur at the 1.91 level that will confirm the bearish trend in existence since reaching its high on 01 Aug 2005.

Unleaded Gas: As with most energies the trend is towards lower prices but still has that support at the $175 level.

CURRENCY

Australian Dollar: Wide lateral trend continues with no end in sight.

British Pound: Minor rest period while on its way towards $1.73 support but the rest may be over.

Canadian Dollar: Long term projection still to the $101 level but there will be rought times along the way. This might be one of them.

European Euro: Bounce off support level and may be making a bullish double bottom but still too early to tell.

Japanese Yen: Broke support, tried to rally but hit the support line, now a resistance line, and coming back down. Nothing to suggest that lower levels do not lie ahead.

Mexican Peso: Rally stalled out. Volume increased on the down side. Indications are that more downside ahead, including new recent lows.

Swiss Franc: A nice bounce off support but not very convincing. Watch out for another test of support area.

U.S. Dollar Index: Despite P&F projections into new rally highs the downside looks like the most likely direction in the near term.

INDICES

It should be noted that the comments in this section are based upon the actions of the Indices futures market and not upon the actions of the respective Indices themselves.

Dow Jones Industrial Average: Massive 6 month lateral trend but weakness suggests more downside ahead.

Nikkei 225 Index: Blow-off trend has ended. Two day plunge may be only the start of a bearish trend that could take the Index back to the 11000 level.

NASDAQ 100 Index: Three day plunge has taken the Index back to its 1550 support. Support not expected to hold.

Russell 2000 Index: Three day plunge broke recent support and tried to stabilize. Next few days will tell if plunge was for real or if it was just a short term thing.

S&P 500 Composite Index: Three day plunge with the rest of the Indices. At support area but not expected to remain there for long. More downside ahead.

FINANCIALS

Eurodollar: A minor rest period within a major slide trend. More downside ahead after it gets well rested.

Federal Funds 30-Day: Rest period after sharp slide. Rest may have reversal potentials but that remains to be seen.

Treasury Notes 2-Year: Support break and sharp downside. Now may be taking a rest. Where next? Lateral probably.

Treasury Notes 5-Year: Trying to break below support but still hanging in there. Support will probably be broken within days.

Treasury Notes 10-Year: Bearish trend breaking latest support but as with most Financials, may be about to take a rest.

Treasury Bonds 30-Year: Still holding at previous support level but action suggests an eventual support break.

A free tutorial on getting the most from the Indices and futures tables can be found on the www.themarkettraders.com front page in the Global Indices section.

Merv Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group

www.themarkettraders.com

[email protected]

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 Merv’s Precious Metals Central. There you will find samples of the Indices plus other publications of interest to precious metals investors.


NEWS YOU CAN USE…


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