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.
Well, it started okay but the week sure ended with a vengeance. Where, oh where are all those gold bugs these days? Manipulation in the gold market? Hey! It happens, live with it, work around it, complaining ain’t doing no good no how.
Gold made its big move on Thursday and Friday. The trend is set once more to the down side but let’s see if this is as serious as it looks.
Long Term: Boy, what a difference a few days make. First, remembering the long term chart shown last week we find that the Friday action has taken the price of gold below its 200 DMA. For the followers of the 200 DMA concept this has turned gold bearish on the long term. My concept requires the line to also turn down and that wouldn’t come till about the $400 level. The RSI also shown last week is still in the positive zone although heading lower fast. If one were to draw an up trend line through the 2003 and 2004 lows, Friday’s close is still above such trend line. Despite all the anguish of last week’s action one might not yet run and hide.
Based upon the requirements of my technique gold is below its weighted 30 WMA and the MA is now sloping downward. Using a slightly more accurate daily chart, the long term price momentum is still slightly in the positive zone. Volume is quickly reverting to the negative while the long term P&F chart is still bullish. To be somewhat on the fence I will downgrade my rating from the long term perspective to Neutral for now.
Intermediate Term: Gold has decisively broken its support and is now heading for that previous bottom created in early Feb, at the $411.50 level. Price momentum is now well inside its negative zone and pointing even lower. The volume indicator has turned negative having dropped below a 4 month up trend line and moving average trigger. The P&F chart had been bearish and is even more so after last week. P&F support is at the $415. A move to $410 would break this significant support and project the price down to the $375 level. This is a serious level as my long term P&F chart requires $370 to turn bearish so this projection, if it comes, would take gold to a hair above a long term bear signal. For the intermediate term I continue to be bearish.
Short Term: Ah! the short term, where the action is. As the short term P&F chart shows, the bear trend is quite evident. The latest break below support has given us two separate projections from this chart, one to the $400 level and one to the $392 level. Both are below the Feb low so it will be interesting if that low will hold. As for the normal indicators, gold is below its negatively sloping moving average line with a price momentum that is in its negative zone. The volume indicator is negative and going more so lately. Over the past week we have had 2 days of heavy volume action and both were on down days. That tells you something. On the short term I remain bearish.
As for that Stochastic Oscillator, it has turned down once again, within its negative zone. It still is above its oversold level so there still might be a day or more before we can expect a firming of prices but nothing is certain. However, there is nothing here that would suggest a reversal of trend anytime soon.
U.S. DOLLAR INDEX
Long Term: For the first time in over 3 years the long term P&F chart of the US$ Index has closed above two previous highs (Xs) AND above the long term down trend line. This suggests a long term bull in motion. The only cautionary point is that the down trend line is really a secondary line with the original line being somewhat at a higher level, at about the 90 level. However, the original line is far enough away to comfortably consider the break above the secondary line as valid. After the break we can now calculate a projection for the move to the 93 level. This would place the Index above its 2004 high and in the process activate additional signals and projections but let’s not get ahead of ourselves. In my first commentary published on the Gold-Eagle site (on 18 Jan 2005) I mentioned the continual strengthening of the long term price momentum (this could be seen in the positive divergence shown on the chart last week) I wrote “It has all the indications of a long term reversal of trend somewhere in the not too distant future, if it is not already here.” Hey! Sometimes these indicators are accurate. Bullish on the long term.
Intermediate Term: The intermediate term P&F chart gave us a confirmed bull signal after all these weeks of only a partial. The projection here can be calculated even higher than on the long term chart. This break is projecting to the 93.50 level, so we have a choice of projections. I will stick with the trend itself rather than the projections. All normal intermediate term indicators are positive so I have gone off the fence and am now in the bullish camp from the intermediate term perspective.
Short Term: What can one say about the short term? Everything is so positive that one might start to get a feeling of overconfidence. The short term price momentum is just entering its overbought zone for the first time since the 2003 rally. Will this move end up just like the 2003 move did, i.e. topping out and then moving into new bear market lows? As I have often mentioned, one should never make up his mind and then go to sleep, one always needs to watch and continually assess what’s happening just in case one is wrong (and we all are from time to time). For now, however, bullish on the short term.
Looking at the Stochastic Oscillator one must become very cautious. It has now entered its overbought zone and is at a level from where previous serious short term reactions had taken place. The next few days may see a topping and at least a short term reversal, if history is to repeat itself.
GOLD & SILVER INDICES
All of the major North American Gold Indices look like disaster zones. All have broken below their earlier Feb lows and are now zeroing in on their lows from 2004. Their actions are far in excess that of gold itself. Very often the stocks (Indices) are a leading indicator of what to expect from gold. These Indices look like such a disaster area that one might just think that it is time for a good rally.
As for the Merv’s Indices, well those are disasters also. Let’s take a look at a couple.
Merv’s Gold & Silver 160 Index: An Index of 160 gold and silver stocks traded on the North American Exchanges. I think this is probably the largest collection of gold stocks regularly followed within any gold Index. The Index value, as with all Merv’s Indices, is calculated weekly based upon the AVERAGE performance of all stocks within the Index. There is no greater weight given one or another stock as with most other gold Indices. This Index is about 10% above its 2004 lows but heading quickly towards that low. Price momentum is negative while the long term moving average is pointing down. Overall, the percentage of stocks considered bullish in this universe of 160 is in the single digit while the percentage considered bearish is 93% for the intermediate term and 89% for the long term. Not a pretty picture at all.
Merv’s Qual-Gold Index (shown last week): From the universe of 160 I have taken the 30 largest and highest quality gold stocks and included them in their own Index. This is the place if one were interested only in the highest “quality” gold stocks. As you can see from the chart, this Index has broken below a 4 year up trend line and is one of the very few that has now ALREADY broken below its 2004 lows. Worse yet, off these 30 stocks the percentage of stocks considered bearish is 100% for both the intermediate and long term periods. Nothing here says to buy or hold.
As one who has a fondness for the gold industry, I don’t like what I see but that’s what the charts show. Somewhere down the road the tide WILL turn and great bargains will be had in this industry. One just has to watch and wait for it.
METALS and ENERGY
All of our metals and energies were hit during the week. None escaped the down side.
After declaring Copper to be in a bear market due to the P&F chart, copper took a further plunge confirming such prognosis. The original break and the action this week has allowed us to calculate two projections. The original projection is to 122.50 which is a strong support level. The second projection is all the way back to the 2002/2003 consolidation area at 72.50. These wouldn’t be reached overnight. They are also contrary to what almost every analyst is saying these days.
The chart this week is a long term chart of West Texas Crude Oil. The first thing that jumps out at you is that negative divergence shown by the long term RSI versus the price action. We have seen these several times lately, in gold and gold Indices, in copper and in reverse in the US$ Index. This divergence should be taken seriously until proven otherwise. It is telling us that we have seen the highs in oil and that downside is now the wave of the future. As confirmation of this, there is a well defined accelerating bearish FAN Principle trend lines shown. The third FAN trend line looks very much like a blow-off and the crossing of that FAN trend line, on the down side, gives the death knell to the bull move. As in all analysis, one could be wrong and that’s why we continue to watch and assess and not rest for long on any decision. Better to be safe and accept an error than to blindly refuse to accept one, when they are made.
Mid-Week Review: See you on Thursday for a review of the first few days of trading during the week.
Merv Burak, CMT
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.