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.

Let’s see. Gold down 0.6%. Gold stocks down anywhere from 2% to 7% depending upon the Index. Sure shows the multiplier effect except in reverse.

GOLD

No, you’re not seeing things. That is not a gold chart but a silver chart this week. From the long term standpoint the charts change very slowly so putting a chart of gold, even changing from bar to P&F charts, seems like the same chart over and over again. Since silver is one of our “precious metals” I guess it’s about time to show it more often. Shown is a very long term P&F chart of silver going all the way back to 1967.

Last week I showed a very long term P&F chart of gold and what it was saying about the very long term trend and potential. Silver, from the very long term point of view, is somewhat different in that it has not yet broken on the up side. That would come on a move to the $9.00 level effectively breaking above 2 previous highs and a secondary down trend line. Once there we would have a projection to the $18.00 level. Early in its move it would hit the $11 mark to give us a second projection to $24.00 (possibly higher if it has any reversals along the way). One concern for such a scenario is that very long term primary down trend line which must be broken for the trend and projections to have any validity. Those who have followed my writings will recognize this situation as being very similar to that of the U.S. Dollar Index earlier this year. This very long term silver prognosis ought to hold us for a year or so.

I last showed the basic long term P&F chart of gold in the 30 Sept 2004 commentary. All that has changed since then is that the chart has tacked on another X in the upward trend. So, despite the volatility of the past week or two nothing much has changed from the long term P&F point of view. The next long term target is the $560/$600 level.

As for the usual long term indicators, gold is above its positively sloping moving average line and the price momentum is still very much in its positive zone. The only concern is the negative divergence from the momentum indicator. That is not a good sign and may result in a drop more serious than presently envisioned, but no need to panic, yet.

On the long term I am still BULLISH.

For the intermediate term I first look at the P&F chart (not shown). The only change is an extra O plotted in the down direction, but of little concern. The intermediate term projection to $545 still stands and would require considerable negative action to nullify.

The price action is now straddling the intermediate term moving average line but the line is still sloping upwards for a caution but no great concern. That short term support at the $461 level is a concern. It is just a hair above the previous Dec $459 resistance level that held for 10 months. Such resistance, once breached, very often becomes a strong support, so breaching the short term $461 support might place the game in position to move below that $459 level, and would be a serious concern at that point. Intermediate term price momentum is heading lower but is still inside the positive zone, for a caution but no reversal yet. Likewise volume, which has turned down and has broken below its intermediate term moving average line but the slope of the line is still positive, so a caution but not a reversal.

Putting the intermediate term indicators together there are several cautionary indications so one might hold off any intermediate term commitments but still the prognosis is BULLISH until reversal is confirmed.

My short term and immediate term analysis remains in my Merv’s Precious Metals Centralsubscribers section (see below). Must leave something extra for the paying customer.

NORTH AMERICAN GOLD INDICES

This week we will take a quick look at the Toronto Exchange S&P/TSX Capped Gold Index. It is considered one of the major North American gold indices so let’s take a look.

S&P/TSX CAPPED GOLD INDEX

Space limitations do not permit the chart but it can easily be obtained from numerous chart web sites, including www.stockcharts.com. There are a few things notable about this Index. First, it is the only major North American gold index for which I get volume information. Why I don’t for the others is not understood. When one relies upon third party data vendors you get what they give you. There is, however, a risk when analyzing volume for an Index which is made up off several or more components. Such volume can be affected by stock splits which may not affect the Index but does the volume. Component stocks are added and subtracted affecting the volume information. Changing one stock for another stock affects the volume information if the two stocks had different investor interest. So, one should take volume information with a grain of salt for Indices composed of a variety of components. I’ll get to the volume here shortly.

One can see the topping and then the sharp drop on the chart. The Index is below both its short and intermediate term moving average lines and both lines are sloping downward. The Friday bounce, should it turn into a rally, still has a little ways to go to turn these moving averages around. The Index is also bouncing off its support (at 194) BUT that support is from action in late Aug. Gold itself is still some distance from its similar support. The Index is considerably below its late Sept period where the gold support is situated. Price momentum had moved into the negative zone but bounced back into the positive on the one day price rally. As for volume, I haven’t had a chance to check out if there has been any change to the Index components but looking at the daily volume action is not encouraging. Relatively low volume throughout the advance from the May low. Volume then picked up at the very top and continued heavier as the Index moved lower. This is not the volume action one is looking for. This suggests major players getting out when THEY think the getting out was opportunistic. I would be surprised if the Index did not break below that support pretty soon.

MERV’S PRECIOUS METALS INDICES

Wow! Gold bullion price down 0.6%. Merv’s gold Indices down anywhere from 2 to 7 %. The multiplier effect at work, but in reverse. For two years now gold stocks have been doing nothing but moving sideways. There was hope that this time, since the bottom in May, we would see the old highs exceeded but it looks like once more the highs are holding. Let’s look very briefly at the individual Merv’s Indices

MERV’S GOLD & SILVER 160 INDEX

The Index has moved below its up trend line from the May lows and below its intermediate term moving average line. The moving average line is still, however, very slightly sloping upwards. The intermediate term momentum is still positive but only slightly so and moving lower fast. As the Gold Indices table suggests, the technical rating for the intermediate term is – N. It would require very little extra downside action to go NEG. As far as the long term is concerned, it would still take a few more weeks of negative action to turn this time period to the NEG side.

As far as Index “breadth” is concerned, the week’s activity saw 34 stocks advancing while a full 120 declined. A very sour week. Other than the gamblers who bet on individual stock action and are not concerned about general trends, this is no time to be in the market on the buy side. The turn will come and good bargains will be seen ahead but wait for it.

MERV’S QUAL-GOLD INDEX

It has not been a good couple of weeks for the quality precious metal stocks. The Index is reacting lower from the resistance trend line and has moved once again below that long term up trend line from the start of the original bull market. Although the Index closed below the intermediate term moving average line the line itself is still oh so slightly pointing upwards. Momentum also is positive but only very slightly so. It’s like standing at the edge of a cliff with half of your foot already over the edge. Long term there is still no worry for probably a few weeks yet.

The “breadth” of the quality market is decidedly negative this past week with only 2 advancers and 28 decliners on the week. As with the overall market, the quality stocks are still not the place to be buying, at least not yet. Bargains will be ahead so wait for them.

MERV’S SPEC-GOLD INDEX

I would guess that most of the readers to these commentaries would find themselves in the speculator or gambler category. Well, this is a rough time for speculators. The Index broke below its up trend line from the May lows over a week ago and continues lower. Unlike the other Indices, it never got anywhere near its previous highs before turning. The Index is well below a negative sloping intermediate term moving average line and price momentum is in the negative zone. Unlike the overall market or the quality issues, this Index is already rated as NEG on the intermediate term. This Index is also a lot weaker than the others from the long term standpoint being only a hair from getting rated as NEG.

On the week, the “breadth” of the Index was somewhat better than the quality issues but not enough to shout with joy. With 10 advancing stocks and 20 declining stocks, that is still a serious negative ratio. Stay away from “investing” in the speculative precious metal stocks, however, there are still a few in this category that are interesting gamble plays.

MERV’S GAMB-GOLD INDEX

Unlike the other Indices this Index has had a more bullish history. It made a new all time high in early 2005 before coming down to its lows in May with the rest of the crowd. The May lows established a long term up trend line that is still active with the Index still some distance above. The rally from the May lows came very close to breaking the previous high but not quite. The past two weeks has seen a sharp reaction in the Index and we’ll just have to wait and see how far it goes. As the Gold Index table shows, this Index is still rated as – N for the intermediate term and POS for the long term.

With 5 advancing stocks and 25 declining stocks on the week, this is also not the place to be looking for a place to “invest”. It is, however, the place to be gambling as there are always a few gambling variety that are moving counter to the trend. So overall, if one is in the gold and silver sector one is a gambler at this time.

FUTURES COMMENTARY

METALS

Gold: See analysis above.

Silver: The up trend line from the late Aug lows has been broken as has the short term support. The short term moving average line has also been breached and the line itself is pointing lower. However, all else seems still to be in order so no need to panic. Do panic if we should get another couple of down days.

Palladium: Moving higher step by step. It’s on its latest step and needs $220 to continue. A move to $206 could start a reversal move.

Platinum: Continues to move upwards at a constant momentum band. Momentum is at its lower level of the band so an upward surge in price is needed to keep things on track.

Copper: Since May copper has been moving upwards within a wide channel. It’s at the channel upper end so one might expect a move towards the lower channel line either as a reaction or as a lateral move.

ENERGY

West Texas Light Sweet Crude: All signs point to a continuation of the bearish trend. I now have a P&F projection down to the $46 level but let’s not get too far ahead of ourselves. The most damaging indicator is the volume. It has increased on the downside moves, not a good sign. There will be rallies but they will probably be short lived as long as the bear remains in force.

Natural Gas: The action continues to be trapped between the second and third accelerating FAN trend lines. However, it just might break on the down side should it drop to the $12.80 level. Momentum seems to be ahead of the price action, on the down side.

Heating Oil: Broke $1.90 support but still holding and not plunging. Stochastic Oscillator in the oversold zone so one might expect a rally of sorts very soon.

Unleaded Gas: The market action is even weaker than that of oil. It’s lower than before Katrina but is the pump price lower? Of course not but the petro companies always have a good explanation.

CURRENCY

Australian Dollar: In a short term down trend within an intermediate term lateral trend. Short term must end soon or the lateral trend gets penetrated.

British Pound: Bottoming and stabilizing but needs to breach the $1.78 resistance to get a new bull move going.

Canadian Dollar: Short term weakness but still looking okay from the intermediate and long term. However, a move below the $0.84 would change all that.

European Euro: Continues to hold above the $1.19 support. Looking more and more like a double bottom reversal pattern but needs $1.26 to verify. Intermediate term momentum negative but showing some positive divergence with price action.

Japanese Yen: Continues to hold at the May 2004 lows but looking weak. Next solid support could be at the $0.83 level.

Mexican Peso: Price, momentum and volume action all seem to be heading towards a lateral trend.

Swiss Franc: Support at $0.77 holding. Double bottom pattern evident. Now on to $0.82 to verify the double bottom. Positive divergence in momentum and a positive volume action helps.

U.S. Dollar Index: Still needs a move to the $91.00 level to confirm a P&F upside break. Weak volume and momentum action causes one to worry it will not come.

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: Recent action has been negative but the Index is still within a wide lateral trading band.

Nikkei 225 Index: Bouncing off the intermediate term moving average line but the trend is still towards lower prices.

NASDAQ 100 Index: Recent rally not impressive and further downside can be expected in days and weeks to come.

Russell 2000 Index: Stabilizing but not looking strong. More downside expected ahead.

S&P 500 Composite Index: Stabilizing but futures volume action very low and not encouraging. Expect more downside unless it breaches the 12000 level on improving volume action.

FINANCIALS

Eurodollar: Continues to stabilize around the 95.60 level.

Federal Funds 30-Day: Continues to stabilize at the 96.00 level.

Treasury Notes 2-Year: Low volume turn around may go a few points but needs improved volume action to go far.

Treasury Notes 5-Year: Same comment as for 2-Year.

Treasury Notes 10-Year: Same comment as for 2-year.

Treasury Bonds 30-Year: Same comment as for 2-year. Broke down trend line for extra confirmation of a rally in progress.

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.


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