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.
Are we into the summer doldrums or something? Although there is sporadic action in the markets there still does not seem to be any real concerted moves, except in some individual gold stocks. Let’s see what was happening this past week and see if we can glimmer any meaning to it all.
GOLD
The action in gold is becoming ho-hum. It appears that speculators just left town and went on vacation. Volume of trading in the futures market is pathetically low.
LONG TERM
The long term P&F chart may be setting itself up for a possible reversal to the bear side. No, don’t panic yet. The main feature of the long term P&F chart was how far away it was for two previous bottoms to be breached (one of my criteria for reversal confirmation). As previously mentioned, this would take a move to the $370 level. Well, it looks like the recent action has given us a substantially higher price. We now have two lows at the $420 level with the price moving higher to establish such lows. Should the price move to $440 we then would have established two lows at $420 with a move then to $410 for a bear confirmation. Lots of guesswork involved here so let’s just wait and see how things develop.
As for the usual indicators, gold continues to move slightly higher above its long term up trend line and above both my aggressive 150 DMAw (30 WMAw) and the popular 200 DMA (40 WMA) lines. The 200 DMA line is still pointing upward while the 150 DMAw is still negative but starting to turn. We can now consider the down trend line joining the tops of early Dec and mid March as a long term down trend line, being 6 months in duration. Although the upside crossing of the moving average is positive this down trend line still requires caution. As for the price momentum, the indicator is little changed from last week except for an extra very minor upside nudge. It is still positive but awfully close to the neutral line and potential negative reading. The On-Balance Volume (OBV) indicator is still long term positive but showing signs of flaming out. All in all, with the price of gold nudging that $430 level and with so many positives in the indicators, I am once more upgrading to bullish.
INTERMEDIATE TERM
Technicians can sometimes play around with charts. Looking at the intermediate term P&F chart (shown today) the simple analysis (which I usually prefer) says that gold last gave a bear confirmation signal in early Feb at $415 before rebounding and subsequently moving sideways. At present it would take a move to $450 for a bull confirmation. However, and this is where playing with charts comes in, I can draw an alternate up trend line (the green one) from the May 2004 low through the July low. The Feb low would then not have broken such trend line, leaving us with a still bullish intermediate term P&F analysis. This alternate trend line analysis (which is as valid in P&F as it is in bar chart analysis) may prove to be more on the mark but I prefer to stay simple. Once you try to be too brilliant you are likely to get into far worse situations that you can’t easily get out of. Keep it Simple.
As for the usual suspects, gold continues above its intermediate term moving average and the average continues to struggle trying to turn up. Gold is trapped below the down trend line mentioned above but above a support level from the Feb low. These two lines make a triangular pattern, which is usually a continuation pattern. I would emphasize the word “usually” as surprises do happen. As for the intermediate term price momentum, it continues to flirt with its neutral line and is once more above the line in the positive zone. As for volume action, the OBV indicator is still positive but the daily volume is sick. I think I will continue with the previous neutral assessment of the intermediate term until a clearer picture is presented by volume and momentum.
SHORT TERM
As for the short term usual indicators, gold continues to move above its short term moving average line and the line continues to point higher. We can now draw a reasonable short term up trend line and a resistance level. Gold is just touching that resistance and requires a close above the $430 level to confirm a breach. The short term price momentum inched into the positive zone a little over a week ago and remains there. Volume has been in the doldrums lately. Since the rally started a couple of weeks ago the level of speculator enthusiasm just kept sinking lower and lower. I don’t consider this action as bullish but who knows, this is the summer season and many speculators may have just left the markets to go on vacation. It happens. For now I am still bullish on the short term but this could change should gold not be able to pierce that $430 level.
As for the immediate trend to see the odds of gold piercing the $430 level, well the aggressive stochastic oscillator is not an encouragement. The chart shows the breaking of a short term up trend line and the breaking on the down side of the overbought line (the 80% line). The oscillator still remains below its trigger line and as long as it does the message is negative. Although the immediate direction is negative one can have some comfort in that the indicator is still within its positive zone and therefore has some positive strength working for it.
U.S. DOLLAR INDEX
The U.S. Dollar Index just keeps on trucking. It seems to be in a bull phase that appears unstoppable, thanks to the Euro. To correct myself again, this should have negative implications for the price of gold if the opposite relationship between the two movements are to continue. However, there is a cautionary event on the charts. Looking at some of the price momentum indicators, the intermediate term indicators are at a high level not seen since the top in 2002. On the other hand, we have seen several momentum highs at this level and beyond during the US$ Index bull from 1995 to 2002. So, good news if we are in a long term bull but bad news if this is just a rally within a long term bear. I’ll go with the first until proven otherwise. And that proof may not be long in coming. Shown is the Merv’s accelerating FAN Principle trend lines. That third FAN trend line is very aggressive and very much has the feel of a typical blow-off move. When the US$ Index breaks below this line, and it cannot continue above the line for ever, that should be the end of this US$ Index bull move for some time (again, should THAT happen, that is good for gold).
GOLD & SILVER INDICES
Most North American Gold Indices are continuing to bounce off their May 2004 lows for what some technicians are suggesting may be a solid bullish double bottom pattern. I’ll wait for the action to tell me so. By the double bottom criteria one does not get confirmation until the high between the bottoms has been breached. That is just too far away for me. Let’s just say they are rallying but still have much more to prove.
Most of Merv’s Gold Indices are doing the same as the major North American Indices, except for the Merv’s Gamb-Gold Index of 30 gambling stocks. This Index is rallying off its Feb 2005 low, far above the May 2004 low. During the rally so far it has been one of the weaker Indices, to be expected as the masses don’t get interested in gambling until they are comfortable with the trend of the more quality oriented stocks. However, this is where the big % gains are made. When these stocks move, they really move. Over the past 3 ½ years we have had three major moves in this Index. From late 2001 to mid-2002 we had a move of 353%, from late 2002 to late 2003 we had a move of 398% and from mid-2004 to early 2005 we had a move of 85%. Along the way there were some bummer periods also so not everything is roses with this Index. However, this is just to show that once the gambling stocks start to move, they move fast and furious. They are not for the faint of heart and most definitely NOT for the buy and hold “investor”.
METALS and ENERGY
Let’s look in on a few of the Metals and see what they are doing.
COPPER
Since showing that some analysts (name withheld to protect the guilty) can be wrong, copper quickly moved right up to the previous wedge upper trend line. It touched the line and stalled. Now what? We have an aggressive up trend line on the copper chart, similar to the third US$ Index FAN trend line. The crossing of this line might be the start of a new move to lower levels. Looking at the Stochastic Oscillator, it had been in the overbought zone and has crossed below the line and heading lower. This also suggests a move to lower levels may be just ahead.
SILVER
The short term P&F chart needed $7.70 to break out of a long lateral trend. It wasn’t able to do so and is reacting lower. Very short term the reaction may be ready to take a rest and maybe rally a little. In the end we are still in the lateral trend which needs $7.70 on the up side or $6.80 on the down side to establish a new trend.
TEXAS LIGHT SWEET CRUDE
Looking at the various P&F and bar charts one sees a commodity in a bull market. However, lately it just hasn’t been able to breach resistance levels. Although the recent high is at the $58 level, it is at the $56 that there seems to be a stumbling block. Oil needs to break above both of these highs to continue the bull.
Mid-Week Review: See you on Thursday for a review of the first few days of trading during the week.
Merv Burak, CMT
[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.