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.
Once again the week started with a snooze. On Thursday it looked like gold would take off but on Friday it stalled. However, the trend still has not come to an end and the Friday hesitation may be only a misplaced step along the way to new highs. Let’s go through the motions of looking at the charts to see what they are telling us this week.
The long term chart (shown last week) of gold traces its history to the start of this gold bull market. It was the uptrend half of the long term P&F chart often shown, but shown in the more normal bar chart format. We have a well defined up trend line on a semi-log scale chart. A move to the $410 level would break that line on the down side. That price level, $410, comes up again in the P&F chart as the price at which the P&F would confirm a new bear market, should it be reached. We see the price has crossed its long term moving average line, the popular 200 DMA (or 40 WMA) once again on the up side. The line, however, although still pointing upwards has been slowly turning towards the horizontal and at this time does not show great strength. The long term price momentum, shown as the 40 week RSI, is also showing weakness, although still positive. It is once more bouncing off its neutral line but not enthusiastically. The RSI had made lower lows in early 2004 and late 2004 as the price made higher highs. This negative divergence is very important and suggests that unless we see new highs in gold along with higher highs in the indicator, the long term bull may have trouble ahead. This is something that bears close watching. Lastly, the volume indicator is still showing volume strength on the long term basis but I have found this indicator to be a lagging indicator at market tops. All in all, I am still bullish on the long term position of gold and will remain so until at least a move down to the $410 level.
This week’s Candlestick chart shows us how the intermediate term picture looks like for gold. First, on a P&F chart we have plotted another X, in the $445 block, so that we now have three Xs at $445 for a strong resistance level. We still require a break-out and bull confirmation by a move to the $450 level. On this week’s chart that level is seen as the Dec and March tops. Not shown on the chart but can be visualized are three Merv’s decelerating FAN Principle trend lines drawn from the same apex point, the May 2004 low. The first line drawn through the July 2004 and Jan 2005 lows, the second line drawn through the Feb 2005 low and the third line through the recent May low. The gold action has been trapped inside the boundaries of lines 1 and 3 ever since the initial crossing through line 1 in early Feb. The lines on differing occasions have served as resistance lines or support lines. The recent action is moving gold closer and closer to line 1 and we might expect a reaction from that line when gold reaches it. That would be around the 450 level. As for the usual indicators, gold is above its intermediate term moving average line and the line slope is upwards. The price momentum is inside its positive zone and hitting up against the same resistance level as the price is. The volume indicator is exceeding its previous highs for a very positive indication. With all that I can only continue classifying the intermediate term as bullish.
Looking at a short term P&F chart one sees a bullish pattern that has been moving up in steps. The latest projection from the short term chart is to the $480 level, which is right in the same vicinity as the intermediate term projection of $475 from a year ago. The short term P&F chart is some distance from reversing so I will take a look at it next week if required.
This week’s short term chart shows the past few weeks of rally that gold has been having. It has stayed within a well defined and aggressive up trending channel. It cannot last much longer within this channel and the odds are heavily towards a break on the down side or at least in the lateral direction. We might be seeing the sideways move on Friday but we’d need another day or two to confirm it. However, going through the motions of reviewing the indicators we have the price above it’s very aggressive up trending moving average line. We have a price momentum that is way deep inside its positive zone, so deep it is inside its overbought zone (above the 70% level). The price momentum (not shown) has just crossed its up trend line and is ready to drop below the overbought line for a trend reversal warning. If we look back we see that in the past few months this momentum has been above the 70% level, above the overbought line, on two separate occasions. Both times (the Dec high and the March high) it has resulted in a significant drop in price. This is what we have to look forward to. Although the volume indicator is quite positive the daily action still leaves a lot to be desired. So, on the short term I am still bullish on gold BUT am getting very edgy and expecting a surprise turn around. One stays with the trend in motion but always on guard against surprise reversals.
As for the very short term or immediate action I look at the aggressive Stochastic Oscillator. The SO has made a double top pattern and is now moving lower. It has crossed below its overbought line but not yet below the low set in between the double tops. That could come in another day or so and signal a reversal of trend, at least for a very short term. What happens after that will depend upon the continuing action.
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U.S. DOLLAR INDEX
The US$ Index is once more moving higher after a minor reaction. These minor reactions always occur and cause many to think a reversal is in progress, that is why I use a variety of indicators to keep my mind open. One question is if this rally will continue or IS IT coming to an end? Since the Euro represents more than 50% of the US$ Index value (in a reverse way) what happens to the Euro is important. Looking at the Euro chart one sees nothing of encouragement for the Euro and therefore nothing but encouragement for the US$ Index. Since the Euro reached its high (at 1.369) on the last trading day of 2004 it has been down hill all the way with one reasonable rally along the way.
I am not an Elliott Wave enthusiast, not because I think it is not a valid method but because I am basically a lazy individual and the Elliott Wave requires more attention than other methods of market analysis that I use. As I understand the theory, major market trends move in five steps up with corrections of three steps down. The reverse is true for major bear markets. If I assume the bull in the Euro started in Feb 2002 then I can see 5 steps (3 up and 2 down) getting to the top in Dec 2004. Now, assuming that we are still in a major bull market, we should be into the 3 step down correction. If so, we are in the third step and close to a bottom. However, I think we are in a new major trend, a bear trend. Therefore being only in the third step down suggests still a lot more downside to come.
If I am right in the above simple Elliott assumption (and again, I am not really conversant in the Elliott Wave Theory) then the impact on the US$ Index (and the US$) are very bullish for some time ahead.
As I have often mentioned, these are interesting games technicians love to play with charts and theories.
GOLD & SILVER INDICES
This week we look in on the most popular North American Gold Index, the PHLX Gold/Silver Sector Index.
PHLX Gold/Silver Sector Index (XAU)
The Index has doubled in price since the start of the bull in late 2000. I guess that’s the kind of performance many investors are happy with for the presumed extra safety of high quality stocks. The recent bounce off a long term up trend line is so far not too strong and is now coming up against an intermediate term down trend line. The action has crossed all three time period moving average lines but the long term moving average line is still sloping downward. Momentum indicators are all moving higher with the short and intermediate term momentum already in their positive zones. The long term should get there very soon. Although things look positive the chart suggests that this Index is in a year and a half lateral trend which will continue for some time. There is nothing in this chart that would get my juices flowing with excitement.
MERV’S GOLD INDICES
To get the juices flowing one would need to look at the performance of the Merv’s Gold Indices. Even the highest quality Index, which one would expect to have the lowest performance, has doubled or tripled versus the performance of the PHLX Index. Some of the PHLX component stocks have done well but they are not adequately represented in the index calculation due to the PHLX (and all other major Indices) weighting method of index calculation. Merv’s Indices are calculated based upon an average performance of each stock in the Index. No stock is given a higher weight than any other stock.
Despite gold moving slightly higher on the week the gold Indices moved lower. Most noticeable was the percentage bull/bear ratings for the short term. Where a week ago many of these Indices had bullish ratings of 80% to 100%, this week those bullish ratings dropped sharply to the 50% to 60% range. This suggests that the stocks are in very early stages of turn around and can still reverse very quickly.
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METALS and ENERGY
Most of the attention is focused on gold and oil. However there are a few other metals and energies that are performing well that get little attention. As the table suggests, neither of the focused commodities are the best performers for any of the time periods. The best we have is oil as number 2 performer for the long term (but number 4 for the intermediate term suggesting slippage). The chart today shows the market action of Heating Oil, not one of the most popular commodities but an active one just the same. Below are very brief comments on the rest.
Gold: See comments above
Silver: Still in a lateral trend trapped between $6.90 and $7.60.
Palladium: Moving sideways above a $180 support level without much enthusiasm.
Platinum: Broke above a 6 month 890 resistance level and preparing for more upside ahead.
Copper: Broke above its previous upper wedge trend line and then did nothing. It’s back inside the previous wedge zone and may be once more testing the lower trend line. This, despite all the bullish “news” swirling around.
West Texas Light Sweet Crude: Continues to make new highs well above that third Merv’s FAN Principle trend line, the blow-off line. No serious reversals yet to be seen.
Natural Gas: Touched a new high but quickly reacted lower. Seems to be setting itself up for more downside action.
Heating Oil: As the chart shows, a great trend that it trying to get established in new high territory. The sideways action at the top, better seen on a daily chart, suggests that the downside is most likely ahead.
Unleaded Gas: In a rally mode but still a little ways away from its previous high. Volume action suggests a weak up trend.
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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.