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 $4.00 drop in gold, a $0.10 drop in silver, a 0.8% rise in the US$ Index, what a day! But is Friday a portent of days ahead or only an aberration? Stay tuned as we hope to find out.
Most of the time, in these commentaries, I focus on the short term. Why? That’s where the action usually is during the week. Long term trends do not change over night or even in a week or two. However, it is instructive to keep in mind where we are from the long term stand point as short and intermediate term movements are affected by these long term trends. A rally or reaction is far more potent if the long term trend is in the same direction. Rallies or reactions may be found to be short lived far more often when the long term trend is opposite to their direction. So, every so often I take a better look at the long term trend. The charts this week are long term trend charts based upon weekly activity. The moving average shown is that of the more popular 200 day simple moving average (or in this case, 40 week simple moving average). I am more inclined to use a slightly more aggressive 30 week weighted moving average in my normal work and in my tables so do not be too confused if this week’s charts do not conform to the table information. The price momentum indicator shown this week is that of a basic long term (40 week) Relative Strength Index (RSI), to conform with the use of the 40 week moving average. Again, for my normal work I use a slightly more aggressive 30 week RSI. So, let’s get to it and see where we are.
Long Term: The chart shows the history of this gold bull market. The upside break and the start of the bull can be seen in mid-2001 with the trend continuing and still in force. The price had broken below the 40 WMA line several times in the process so those analysts who rely upon the breaking of this popular moving average line would have been out and in several times. A good example for frustration. My criterion is always to wait for the moving average line to change its slope into the new trend before validating the break. This happened only once during this bull market, in Sept of 2004. Even then, the price was still above a well defined up trend line and the RSI was still positive and pointing upwards. But I start to digress into a technical seminar, let’s get back to the bull. The RSI is intended to show the strength of the recent price activity. What you see on this long term RSI is a very clear divergence between the new highs made in the price of gold in late 2004 and a lower peak in the RSI at the same time. The new highs were being made with decreased momentum (strength). This very often foretells a coming change in price direction if the momentum continues to show weakness. As we see, the RSI is weak and almost hugging its neutral line in preparation for a break below (but always wait for it). The price is also showing weakness and hugging its moving average line. A drop to or below the $420 level would break below the moving average line but a move to the $400 level might be required to change the line slope. This is a level to pay close attention to. As my readers know, I also pay attention to my point & figure chart. That chart is still bullish and would require a move to the $370 level to reverse. Maybe it can be considered more of a very long term chart. Anyway, that’s a look at the long term chart of gold. You can have fun drawing your own trend lines, support and resistance lines, etc. So, on the long term I am still bullish (despite the more aggressive negative rating in the table).
Intermediate Term: First, the intermediate term P&F chart. It is still technically bearish having broken below two previous lows and an up trend line without subsequent reversal. Gold is now below its negatively sloping moving average line with a price momentum that is also negative and pointing lower. The volume indicator can be considered neutral at this time. From this I can only remain bearish on the intermediate term. One point that should not be overlooked is the intermediate term support at the $423.40 level. The price of gold is just above this support. If it holds above that level then maybe we can reverse our negative assessment but that needs to be proven over the coming days.
Short Term: Ah! Our short term. Everyone wants to know what is going to happen tomorrow, not what has happened last year. You will not learn what is going to happen tomorrow. The best I can do is review the market action to date and see if I can determine the best odds for the most likely scenario for tomorrow.
Well, the short term can be summarized very briefly. The price is below its negatively sloping moving average line with a price momentum that is also negative and pointing lower. Although the volume indicator is at best neutral now, the daily volume action is still underwhelming. We need to see much higher volume activity on upside days before we get comfortable with any potential rally. All in all, the short term can only be considered as bearish with no end in sight (except for that $423.40 support level).
Now for that aggressive Stochastic Oscillator I look at each week. It moved below its oversold line on Wednesday, reversed on Thursday and moved back above the line on Friday. This action might suggest that we are in for a short period of lateral price action or even a rally of sorts. However, this indicator is not considered aggressive for nothing and could change on a day’s notice but that’s the assessment today.
U.S. DOLLAR INDEX
Long Term: What we see in the long term chart of the US$ Index is almost the exact opposite of the gold chart. The long bear is easily understood from this chart. What I did not show due to formatting difficulty was the earlier action in 2000 and 2001. Such action showed a new Index peak in mid-2001 versus its previous high in late 2000. Such new high was not confirmed by the long term RSI. The RSI showed a negative divergence at this point. A subsequent move to almost equal the mid-2001 high occurred in early 2002 but again the RSI was at an even lower level than before. This continual decreasing strength of the price momentum finally had its effect in early 2002 with the bear continuing right up to the end of 2004. What we now have is a lessening of the negative momentum at the recent late 2004 lows versus the lows reached in early 2004. This positive divergence has halted the US$ slide and we have been having a stable to bullish US$ action ever since. The Index is sitting just below its long term moving average line and could cross above almost any day. However, for the line to turn up with any such action would require a move to anywhere between 88 and 90 depending upon timing. As often mentioned, my long term P&F chart would go initially bullish on a move to 86 while final confirmation would require 91 at this time. The trend is there it just requires a little more upside.
Intermediate Term: The Index remains above its moving average line with the line continuing to point upward as it has for about 6 weeks now. Although the moving average has been pointing upward for the past 6 weeks the price momentum has been pointing sideways. It is above its neutral line but just barely. The momentum has not been all that great over this period. The intermediate term P&F chart (shown in the last mid-week review) has not yet confirmed a bullish trend. It has broken above two previous highs but not yet the down trend line for a final confirmation. That would come on a move to 85.50. I will remain neutral on the intermediate term pending that move to the 85.50 level.
Short Term: The past few weeks has seen the US$ Index move up and down, up and down with a constantly changing short term direction. Although it spent some time below its moving average line this past week, Friday has seen it once more above the line with the line slope still pointing upward. Same goes for the price momentum. As for the short term P&F chart, the last confirmed signal was a bullish one. It had since broken below two short term lows for an initial bear signal but as with so many other P&F charts it had not broken its up trend line. The P&F is therefore still technically bullish. All in all, the short term prognosis is still bullish.
As for the Stochastic Oscillator, although it has been heading lower for a few days and just entered its negative zone, it has perked up and I would rate it as neutral until another day or two of further activity.
GOLD & SILVER INDICES
Most major North American Gold Indices have broken below multi-year up trend lines and/or long term moving average lines. The actions of the gold sector are a mess. To more accurately show what is happening to this sector I have shown the chart of Merv’s Qual-Gold Index. This Index includes 30 of the largest gold companies (in terms of market value) traded on the North American exchanges. One is missing, Centerra Gold Inc. (CG.TO) due to lack of sufficient historical trading data. This Index reflects the AVERAGE performance of all the component stocks as opposed to a weighted scale used by most Indices. As an example, the PHLX Gold and Silver Sector Index of 13 stocks has 80% of its Index value based upon less than half of its component stocks. One stock along represents more than 25% of the Index value. Therefore I like the fact that the Merv’s Indices provides a picture of the average performance of all component stocks.
Having said all that, what we see in the long term chart of the Merv’s Qual-Gold Index is not that different from the major North American Indices. We see the multi-year bull market and the recent break of its long term up trend line. The moving average had been penetrated on the down side and is sloping lower, but not yet emphatically. We see a negative divergence in the long term RSI, similar to that discussed above and we see the present value of the RSI inside its negative zone and pointing lower. All these things are not bullish. Along with most other Indices, we see that this Index has not yet broken below its early 2004 lows and this may end up to be a major support, but let’s not place any bets on it. What all this says is that one would not be placing any new long term (or intermediate term) money into this market. For that matter, technicians would have been long gone and just sitting in the sun drinking their cool bottle of beer and waiting for a change of trend.
METALS and ENERGY
The Metals and Energy prices were a mixed bag this past week. The metals were mostly negative except for silver and platinum while the energies were mostly positive except for unleaded gas. Despite this we have seen lately a short term trend with the performance ratings shifting towards the metals away from the energies. Whether this trend will continue and affect the intermediate and long term performances is yet to be determined. We have been watching the ratings slowly get weaker over the past few weeks for all components of this table to the point that this week the only intermediate term rating that is not negative is that of Platinum. The long term ratings are going in that direction also. On the short term (not shown in the tables) Platinum is rated as POSitive while all others are NEGative. This may confirm some articles that suggest that the metals may be a bummer in the coming future. However, these ratings may suggest that the energies may also be a bummer ahead. A real warning for now.
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.