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.

Gold up, oil up, U.S. dollar down, boy what a week! Can we stand another like it? Sure we could. Will we get another one? Hell if I know. But let’s go through our dedicated process and see what’s what as far as the precious markets are concerned.

GOLD

The week started with a snooze but sure ended with a wake up call. Is this finally the start of a move to new highs? Only time will tell but the action sure seems to suggest that. Let’s review the indicators and see if they confirm this view.

LONG TERM

Before we get into the indicators, a few words on the long term P&F chart. With the action on Friday gold went through the $440 level but ended the day closing right at $440. This allowed us to draw the new two Xs on the chart and has established a new support of two Os. What this means is that now for a long term reversal to take place the magic number has been raised to $410 (from the previous $370). This would be the new price at which gold would have broken below two lows and an up trend line to give us a confirmed bear signal. This is an important number to watch as it is not that far away. Good thing the present price direction seems to be in the upwards direction away from this level. An interesting point on the long term P&F chart is a parallel up trend line that can be drawn from the original left side break-out wall from 2001. This parallel line has either been touched or breached on several occasions during the bull market (I will show this line the next time I show the long term P&F chart). The next time that the price can touch this line would be around the $500 level. Sounds good to me.

As for the usual suspects indicators it goes without saying that gold is well above its moving average line, however, my aggressive line has not yet fully turned up. The popular 200 day moving average line (40 WMA on the chart) is pointing upwards and with gold having recently crossed once more above that line most analysts are taking this as the continuation towards new highs. The price momentum had just touched its neutral line during the price lows in late May and has since been bouncing higher into its positive zone. The volume indicator is looking good and has now reached a level higher than when gold was at its peak in early Dec. Putting it all together, it couldn’t look much better for a bull market. New highs here we come.

INTERMEDIATE TERM

As far as P&F charts are concerned my intermediate term P&F chart is still the only P&F chart that has not gone over to the bull side (that is if you ignore that alternate up trend line mentioned last week, shown there as a green line). See last week-end review for this chart. Although the Xs have risen to the $440 level it would still need a move to the $450 level to confirm a new intermediate term bull.

Gold is moving further away from its moving average line and the line slope is gradually turning steeper and steeper in the upward direction. The price has now broken above the previously defined intermediate term down trend line thereby breaking a triangular pattern to the up side for a continuation of a previous up trend. This would suggest a move to the $500 area if we go by the concept that these triangular patterns usually occur at about the trend mid-way location. I would prefer not to go by this concept because I want to see gold at $1500 not $500, but that’s another story. Price momentum is well into its positive zone and volume is acting quite positively after some lethargic period. The intermediate term can only be classified as bullish despite the lagging from the P&F chart.

SHORT TERM

Ah! Now we come to the short term. For a change this one is almost too easy this week. Although the week started kind of dull it ended on a real high note. The action of Thursday and Friday were quite dramatic. Thursday’s volume really perked up and I am interested to see what the volume was for Friday although I will not get that until Monday.

Gold is zooming above its moving average line while the line itself is pointing almost straight up. This condition cannot last long. Price momentum is very positive and has just entered its overbought zone. This is another indication that maybe we will see a trend hesitation in a day or two. I have already mentioned the volume improvement. So, from a short term point of view I continue to be bullish but can see some problems on the horizon.

As for the Stochastic Oscillator, it’s back in its overbought zone but still above its trigger line with no sign that it is ready to drop down. It is quite strong, so much so that it resembles the strength of a strong trend in its early stages. If this should be the case, the SO may not be all that useful in the coming days or weeks. During the beginning of a very strong new trend the SO often moves into the overbought zone and stays there for some time. Its subsequent weakening turns out to be nothing other than the trend weakening slightly but continuing to move higher. This is something one must now consider when looking at this indicator, is the price trend in its early strong bull stage or not? The answer determines how we analyze the SO for the next while. For now let’s call it strongly positive with no reversal yet.

U.S. DOLLAR INDEX


Last week I showed the Merv’s FAN Principle accelerating up trend lines. On Friday the third trend line was penetrated to the down side. Although in most of my FAN trends the crossing of the third FAN trend line is of minor consequences, the crossing of the third FAN trend line in an accelerating up trend is serious. This is often considered the end of a “blow-off” stage with the previous highs not to be seen for some time. Something to watch very, very closely as everyone still thinks that the EURO will continue to drop causing the U.S. $ Index to continue to rise.

GOLD & SILVER INDICES


S&P/TSC CAPPED GOLD INDEX

A few years ago the Toronto Stock Exchange got together with Standard and Poor’s to develop a complete new set of Indices for the Toronto Exchange. These are the present S&P/TSX Indices. Although the component stocks are weighted in their effect on each Index the weighting is capped to a certain level so as not to give any one component stock too great of an influence on the resulting Index value. Gold is one of the Indices developed by this collaboration.

When you combine a currency difference along with the effects of a U.S. price of gold this Index is what you get, an Index that has done nothing for 4 years. The S&P/TSX Capped Gold Index has basically moved sideways but within a very wide trading range. For the past two years that range has been tightened up a bit but it is still in a lateral direction. This past two year period looks more like the other Indices than the first two year period, probably due to differences between a strong and weak U.S. $ periods.

For right now the Index is in a rally mode but not yet long term bullish. It is above its long term moving average line but the line has not yet turned up. Long term price momentum is still negative although it might move into the positive shortly. Volume action in these stocks has been significantly less than in earlier periods and is considered a negative. All in all, investing in the quality Canadian gold stocks, in Canadian currency, does not yet look like a good thing.

MERV’S QUAL-GOLD INDEX

I usually show the Merv’s Gamb-Gold Index because that is where the action is in gold stocks but many investors prefer the “safety” of the quality stocks so here is the Merv’s Qual-Gold Index. One can see a very stark difference between the Merv’s Qual-Gold Index and the S&P/TSX Index, even though all of the component stocks of the S&P/TSX are included in the Merv’s Index. The major difference is the use of equal weighting for all component stocks in the Merv’s Index and many of the stocks in the Merv’s Index are shown in U.S. $ due to their trading on U.S. Exchanges. The fact that some stocks are in U.S. $ and some in Cdn $ in the Merv’s Index is no problem since the Index is based upon average % performance and this average % would be the same in either currency.

In looking through the various Indices it can be seen that the Merv’s Qual-Gold Index is still in a better rally mode than the more speculative Indices. This is to be expected as the more speculative stocks, and particularly the gambling variety are usually laggards at the start of a new bull market. They do catch up fast, however, once they get going as the Merv’s Gamb-Gold Index reflects. The Qual-Gold Index is very close to touching its previous up trend line (now considered a resistance line) and a negatively sloping 40 WMA line. This is a point of great resistance so one might expect the Index to stall and possibly reverse for a while, upon touching the two. Although the long term price momentum is just about to go into the positive zone it does not project strength at this time. Putting everything together, my money would not be on the “quality” issues right now. I would still wait for the speculative or gambling stocks to move.

METALS and ENERGY

TEXAS LIGHT SWEET CRUDE

Much has already been said about the fact that Oil has hit a new all time high on Friday. This is true and I will take a look at the indicators shortly but first let’s take a look at a long term P&F chart of oil.

What the chart shows was that oil gave a confirmed bear signal on a move to the $50 level recently. Since then it has moved sideways, which is often a sign that the signal may be false. We have seen this before. Confirmation of a false signal must await new highs and that will come on a move to the $60 level. Although new highs were made on a daily basis P&F charts filter out minor moves and only record major price changes as defined for the chart. So we have the situation at the present time of a commodity that is making new highs but still requires a further move of about a buck to confirm a new high. Should it reach that $60 level for a new high we would then be able to calculate a projection for the move to the $78 level. I wonder what that would do to the economy and the stock market?

Looking at the intermediate term indicators one is struck by the fact that both price momentum and volume action are underperforming versus the performance of the price. This does not suggest a strong move. Although the short term move has been very strong with nothing to suggest a halt, one can almost imagine that $60 level not being met. The next day or two are going to be very interesting. If Texas Light sweet Crude does not make it to the $60 level within the next day or two, watch out below.

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.