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.

First, let me offer an apology to those that just might have been looking forward to the Mid-Week Edition and couldn’t find it (I hope there were at least a few of you). Other activities had taken a priority and I just couldn’t get the mid-week edition out in time. This might occasionally happen but I will try and not let it happen too often.

GOLD

Gold didn’t do much during the week but many gold stocks had better than 10% gains. There is not that consistent link between the performance of gold versus the performance of gold stocks in general. Let’s see what gold is doing and we’ll worry about the stocks later.

LONG TERM

Well, here we are looking at the long term P&F chart again. As mentioned last week, we now have a solid support at the $420 level that should hold if gold has any respect for its admirers. Gold has not broken the long term up trend since the start of the bull in 2001. Should gold break below this support by trading at or below $410 the first long term projection would be to the $330 level. On its way there it would trigger a second projection to at least its previous lows around the $250 mark. But we are confident that the support will hold.

As for our more usual indicators, we still have that situation between the popular moving average and my more aggressive moving average. Gold is still below both averages but while my average has already turned down the more popular average has not yet done so. We need a move that will close above the $433 level for gold to be above both moving average lines. Based upon a daily chart the long term price momentum is just a hair above its neutral line for a positive but weak reading. Several previous rallies have started with the momentum at this level, we’ll just have to see if it happens again. As for the long term volume indicator, well it’s not a good indicator of long term market trends. It is too often a lagging indicator at market tops and can hold one back from catching the turn in a reasonable time period.

NEUTRAL on the long term awaiting better confirmation of a turn around or of a support break.

INTERMEDIATE TERM

The intermediate term P&F chart is still giving us a mixed message. It had given a confirmed intermediate term bear signal back in early Feb but has since moved sideways with volatile up and down moves. It has not reversed that signal nor has it reconfirmed it by moving lower than the original signal level. It is back to a support level and could break the support by trading at $415 but that would still place it back to where it was during the original break and another solid support. Despite the support at $415 it is the support at $410 that really counts.

Looking at an intermediate term candlestick chart one sees an intermediate term up trend line that appears to be broken on the down side. However, nothing serious has yet followed from that break. As I have been mentioning for some time, we need a move to the $410 level before we can expect all hell to break lose. Until then its wait and see, hoping for an up trend to take hold again. Gold continues its move below a negatively sloping moving average line with the line weaving up and down but progressively lower and lower with its tops and bottoms. Price momentum is still negative but bouncing up from a level where previous rallies started. The volume indicator is starting a move up but is still below its intermediate term moving average line.

All in all, still NEUTRAL awaiting either a bear reconfirmation or a good rally.

SHORT TERM

The short term P&F chart has changed very little over the past week. We can see a reversal of direction with a new plot of three Xs from the low of last week. Even with this new plot direction no analysis has changed. We are still in a confirmed short term bear market with some distance before the P&F chart provides a bull reversal signal.

Looking at the short term chart there sure doesn’t seem to be anything interesting happening lately. It’s as if the action is just marking time waiting to pounce at the most unexpected moment. The negative trend of the past couple of weeks appears to be over with the short term moving average line turning towards the positive. It just might go positive with another day or so of upside action. The action itself seems to be trapped between the $418 and $430 levels. These now become the support and resistance levels that need to be breached for a new trend to really take hold. On Thursday we had the very aggressive down trend line broken but that move seemed to be a one day wonder. Friday ended as a down day. The short term price momentum is still inside its negative zone but moving in an upward direction. As mentioned in the past, it was at a level from where several previous rallies started (we seem to have more than one indicator telling the same story). As for the volume indicator, well it is in a rally mode and has just moved above its trigger line for a positive reading.

We have a few positive indicators and a few negative but not enough either way to call a trend. It does look like gold wants to rally but I will wait for better confirmation. In the mean time I am NEUTRAL.

IMMEDIATE TERM

Looking at our Stochastic Oscillator we see a positive situation. The oscillator had a positive divergence versus the price at the recent price low and had quickly exceeded its level at the top of the short rally a few days earlier. It is now into its positive zone and moving aggressively higher. This gives some confidence that we are in for some more upside action ahead. How long such action will be with us remains something that will require continuous watching until a confirmed bull signal of some magnitude is issued. For now, let’s be BULLISH on the immediate term.

U.S. DOLLAR INDEX

A couple of weeks ago the U.S. $ Index broke through the third FAN trend line, often referred to as a blow-off trend. Since then the Index has moved sideways but with a negative bias. After the break it tried to rally but just hit its head against the line and is now reacting downwards. The aggressive Stochastic Oscillator is confirming this negative bias. We have a couple of support levels that would have to be breached before we can claim a new bear market in progress. The first of these supports is at the 88.25 level. Despite supports not yet breached one should be prepared for a down trend. The topping process is becoming more evident each day. To negate this bearish prognosis the Index would have to move to the 91 level, into new rally highs.

NORTH AMERICAN GOLD INDICES

Looking at the table one sees that it was a good week for the North American gold and silver stocks. When viewing the major Indices versus the Merv’s Indices one realizes that it was the higher “quality” or largest companies that performed the best, as a group. The better percentage moves in the major Indices were due to the smaller companies not being effectively reflected in their Index value calculation. We have to go to the various Merv’s Indices, and especially the group Indices to understand which type of stock is moving and which is basically marking time. Here we see that the best performance was provided by the Qual-Gold group and the worst performance by the Gamb-Gold group. This, actually, is somewhat of a bullish action. The general thinking is that during the early weeks of a new bull move investors are not yet that convinced of the move and gyrate towards the quality. After a while, as they gain more confidence in the move they start to gyrate towards the more speculative and gambling type of stocks. Once they get the speculative fever all hell breaks loose and these stocks usually take off like a rocket and produce those 10 baggers every speculator and gambler is looking for.

In reviewing the detail technical information tables for the various Index component stocks (found only in the Subscriber’s section of Merv’s Precious Metals Central) one can see the firming up in the speculative/gambling stocks which seem to be preparing for their moves. Some have already started but most have yet to move. After looking at and commenting on the quality Index last week let’s look in on the speculative Index, the Merv’s Spec-Gold Index. Next week I will finish this discussion on the various types of precious metal stocks by looking at the gambling variety.

Merv’s Spec-Gold Index

As mentioned above, the speculative type of gold stock is not expected to participate in the very early part of a new bull move but starts later. Now, this may be an old wife’s tale because when looking and comparing the Merv’s Qual-Gold and Spec-Gold Indices they seem to be in sync with starting and ending moves, only the magnitude is different. Where the Spec-Gold Index dropped 80% during the 1996 to 1998 bear market the Qual-Gold dropped 70% (Hey, wasn’t the quality supposed to be safer?). During the bull market from the end of 2000 to the beginning of 2004, the Qual-Gold Index advanced 334% while the Spec-Gold advanced 2307%, quite a difference with many 10 baggers in the group. In both cases we had that almost 3 year base building before the new bull. How do these Indices compare since their highs, well both are sitting 17% below their highs reached in early 2004. With comparisons such as this, one starts to wonder where this thirst for “quality” comes from. Both types of stocks, as a group, seem to have very similar risks on the down side but when the up side comes, one is a Ferrari while the other is a Chevy compact.

Looking at the chart of the Spec-Gold Index there are a few obvious lessons to take to heart. The bottom in 1998 had a positive divergence suggesting the end of the plunge. The subsequent second bottom had a serious positive divergence. One should have been expecting the top in early 2004. The long term momentum was screaming negative divergence. And in both cases, the bottom and the top, we broke long term trend lines. Over the past year and a half the average speculative stock has basically been moving in a lateral trend with no new downside breaks. Although momentum is showing greater weakness than the price this has to be resolved. Either the Index drops through support and makes new recent lows or else momentum has to start strengthening. And the strengthening seems to have started. From the details of the Spec-Gold component stock table we see that these stocks have an intermediate term bullish rating of 77% (with a 55% bullish rating for the long term). With the intermediate term price momentum in the positive zone and pointing higher, the move may be on. Now to wait and see what the longevity will be like.

Next week we will look briefly at the more gambling variety of stocks and how this group has performed over the years (even better that the Spec?).

METALS and ENERGY

Gold: See analysis above

Silver: Still trapped in that 6 month later trend and not doing much.

Palladium: If the trading information is accurate then we had a serious one day reversal activity on Friday. Watch out for further downside.

Platinum: Rally continues on light volume. May be heading to the upper trend line of a gentle up trending channel. This would be in the 905 to 910 area.

Copper: Continues to rally but on poor volume activity. Further upside is therefore suspect.

West Texas Light Sweet Crude: The chart shows a bearish situation with the breaking of an up trend line, the topping out and down trending MACD indicator and the down turn of the short term moving average line. Now, that support at the $56 level must hold.

Natural Gas: We’re showing a serious negative divergence with the price moving higher while the price momentum is moving lower. Suggests that the price will end its upside trend soon.

Heating Oil: Price momentum negative, short term moving average negative, On-Balance Volume into new lows, all is not rosy here. The $1.60 support must hold or else it’s back to the $1.35 lows.

Unleaded Gas: Price momentum and moving average still positive but On-Balance Volume giving a warning that all is not well. Must stay above the $160 level.

Merv Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group

www.themarkettraders.com

[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.

To find out more about Merv’s various Gold Indices and component stocks, please visit Merv’s Precious Metals Central. There you will find samples of the Indices plus other publications of interest to precious metals investors.