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.

It’s been a month since we have had a week as good as this one. Now, if only it will continue. Let’s read the tea leaves and see what they say.

GOLD

LONG TERM

Long term trends change very slowly, something like watching grass grow. However, looking at a very long term chart one understands that slow and steady really gets places. Gold has had a volatile long term past. For 40 years it had been outlawed in the U.S. Citizens were not allowed to buy gold as the Government held the price at the $32 level. In 1971 Nixon finally let people buy gold and it rose from around $32 to about $200 in a mere 3 years. By 1976 gold was back to $100 and then took off again, this time all the way to $875 in Jan of 1980. Since then it has been going through a lower low and lower high scenario until it once more bottomed, this time at around the $250 mark in 1999. After a false start it once more has been moving higher and higher from the long term standpoint. Gold bulls (or gold bugs) are thinking 1976/80 again but the times are not the same. That 40 years of pent up demand is no longer there. Probably the biggest hurdle that gold must overcome if it is to keep on trucking is that massive resistance that has been developed around the $500 level. Once through there it is relatively clear sailing with minor resistances along the way. How high after that, you ask? Using a very long term P&F chart I can, even now, calculate a projection to the $1875 level. Once through the $500 resistance that projection could rise further to at least the $2900 mark. BUT don’t mortgage your house on it. It could happen or it could not. Life (or the markets) has no guarantee.

Getting more real the normal long term P&F chart, the one with $10 units shown two weeks ago, remains the same. We have a triple bottom that would be very serious if it was broken. However, the latest action gives us some encouragement that the break might be on the up side instead. That would come at the $450 level, but $460 would be better. Should gold break on the up side the new long term projection would then be to at least the $600 mark. It seems that I remember this value (actually $580) from the 2001 break-out so it just might be a very legitimate target.

As for the normal indicators gold has once more moved above the long term moving average line but the line itself is still in a basic horizontal direction. Price momentum has perked up and is moving decisively higher. Volume action is also improving but I will leave it to the shorter time periods.

From the long term perspective I am at least in a plus NEUTRAL mode and getting more positive as the move continues.

INTERMEDIATE TERM

Looking at the intermediate term P&F chart I can see the basic confirmed bear signal given in Feb at the $415 level and still valid. However, the $415 level also ended up to be a support and gold did not go any lower. It’s been a lateral drift since then. Although a confirmation of the bear would be given by a move to the $415 level again it is really the $410 that is the important level. This would break a more serious support. For now it’s wait and see.

Gold has moved decisively above its intermediate term moving average line with the line having just turned up. Price momentum has just crossed the neutral line into the positive zone while volume activity is starting to confirm the other indicators.

By all accounts I should be bullish on the intermediate term but will go with a plus NEUTRAL for another week.

SHORT TERM

Boy, those last three days were something. Let’s hope they continue, although we all know things don’t continue in one direction forever. Both the turn on Wed and the continuation on Thur were on very good volume action. How Fri was we will not know until Monday. The action has all the earmarks of a good turn around with much more to come in the days and weeks ahead, but not necessarily non stop.

The move has taken gold through the neckline of a short term head and shoulder pattern suggesting a move to at least the $436/$438 level. Still not enough to break into new recent highs but it does give gold the momentum to possibly continue and break through. Short term price momentum has moved into the positive zone while volume action has started to turn quite positive (for now).

On the short term I am BULLISH.

IMMEDIATE TERM

Looking at the immediate action one can easily convince oneself that the action of the past few days will continue into the beginning of the new week. The aggressive Stochastic Oscillator is well into the positive zone and just about to enter the overbought zone (above the 80% level). Once in the zone one can then look towards a possible rest period for the move, or even a modest reversal.

U.S. DOLLAR INDEX

The U.S. Dollar Index seems to be at a very interesting position. I had previously shown this long term P&F chart of the US$ Index. It shows the long decline in the Index from its 2002 high. It also shows the primary down trend line and a second, secondary but well defined down trend line some distance from the primary. This secondary line was breached a few months back and we have had a bullish US$ action up to this data. Now the action has taken the US$ Index right up to the primary line and looking at a bar chart of the daily activity, it looks like the trend has come to a halt. The P&F chart shows strong resistance at the $90 level with another resistance at the $92 level. To finally penetrate the primary trend line would need a move to the $92 level.

The daily chart shows us a month long lateral trend which is making a pennant pattern. These patterns are often bullish patterns resulting in a continuation of the trend leading up to the pennant. It is also often located in what ends up to be the mid-way of the overall trend. From this one might expect a break on the up side, a break through that primary down trend line and a continuation of the bull trend in the US$ Index. If this is so, it portends ill for the price of gold, as gold is supposed to move counter to the US$ Index trend. As for me, as a technician I do not discount the value or the message from well established patterns but am not pro-active when I see one. I am inclined to wait for the confirmation of the action and go with the flow.

So, it looks like the probability of the $ is for more upside but I’ll wait and run with it when it happens.

NORTH AMERICAN GOLD INDICES

The one problem I still have with the move in gold last week is the fact that the various North American Gold Indices did not participate in the move. These Indices often have a habit of moving counter to gold, and leading the trend. If this is so then gold may not have much of a move ahead. The gold Indices are all in topping modes with very low price momentum. Let’s just see how the AMEX Gold BUGS Index did. For those who are curious, BUGS is an acronym for Basket of Unhedged Gold Stocks. Stocks in this Index represent companies that do not hedge their gold production, or do so on a relatively short term basis.

Chart not shown but we can very easily see the topping process in this Index. Most of the North American Indices are the same. Although the Index had crossed its intermediate term moving average line almost two months ago it could barely get its price momentum to go positive. That momentum is back on the neutral line and not showing any strength. One can also see the difference in the price activity versus gold, during the past week. The first two days in the Index were down days (gold had one up and one down). The next three days were basically sideways with little movement. In fact all three days of activity were within the trading range of the Tuesday’s action. I’m sure this has some significance but at the present time I’m at a loss. Anyway, this does not show an Index that is in the process of a new bull run. Maybe things will brighten up during the week, let’s hope.

Merv’s Gamb-Gold Index

This is the last in what turned out to be a series of commentaries on gold stocks, the various categories of stocks and the various Merv’s Gold & Silver Indices. Today we take up the topic of gambling stocks and show the Merv’s Gamb-Gold Index which was developed to show the performance of these stocks. Merv’s Gamb-Gold Index does not have the same amount of historical data as does the Spec-Gold Index shown last week but from the data that we do have it suggests a very similar performance to the speculative or secondary gold stock group.

There is a general fear of the gambling type of gold stocks within the masses. In my view this fear is unfounded given some simple rules.

First, understand one important thing. Regardless of what you may read, from whatever source, you DO NOT REALLY KNOW what is happening within these gambling type of companies. When the sad news breaks, and there almost always is sad news, the stock would have already been long gone into the dumper.

There are literally hundreds of gambling gold stocks out there being sold to the masses (and unless you are a gold company executive you are most likely one of the masses). Some WILL create huge profits for the nimble speculator or gambler. Most will cause the masses to lose their shirts or at least their full capital investment.

The ones in the know are usually company executives (but not always), the promoters (almost always) and a few company friendly analysts and brokers. This group of people are the ones buying at the bottom before the good news is generally known and are selling after they have their significant profit or before the bad news is generally known. Yes, I know. This sounds like trading on insider information. Get real, it happens all the time. Every now and then we have the Martha Steward case for visibility that something is being done but then it’s back to normal.

So, how can the masses profit in the rough and tumble game of gold stock gambling? Well let’s face it. The “insiders” need to buy stock at a low point so that they can sell it later at a high point. This trading is noted in the daily trading (price and volume) data. One only needs to be able to read and understand what this data is saying and buy along with the “insiders”, usually very shortly after, and sell with the “insiders”, usually just shortly thereafter. Sound too good to be true? Well it is, sort of. These “insiders” are not stupid. They often try to hide their activities by creating the IMPRESSION of trading. This causes the masses trying to follow their trades a lot of confusion. With confusion come losses. So what is one to do (other than paying guys like myself huge amounts of money)?

There is a very simple rule for gambling, whether in stocks or in Vegas. Take small losses quickly and let your profits run. Retention of your speculative capital depends upon acting on this rule.

As you can see from the Gamb-Gold Index (and the Spec-Gold Index of last week) when a gambling stock starts a move it can go on for several multiples of profit. Get in NEAR the start of a move and get out NEAR the end of a move. Mistakes are always made, in fact you will probably make at least 2 or 3 for every profit. This is where the “take small quick losses” comes in. You need to understand and accept the fact that there WILL BE losses and keep them small by accepting an error had been made in the original assessment. If you cannot accept the fact that losses do and will occur, and act quickly, you should not be in this rough and tumble game.

The potential profits in this gambling sector of the gold industry could be huge. Just compare the Merv’s Gamb-Gold or Spec-Gold Indices against any other of the usual Indices and you will see the difference in potentials. As often mentioned, the Merv’s Indices are based upon the average performance of the component Index stocks, usually 30 or 100 per Index. For an average, boy what a performance.

In my view the best way to play the speculative/gambling game is by the use of technical analysis. Years ago I had been informed (by a company friendly broker) to watch an up and coming gold stock. I watched and on a technical chart break recommended the stock to my subscribers at a post 10 for 1 stock split price of $0.31. A year and a half later, again due to chart analysis, I recommended my subscribers sell at $23.00. The company went broke with the stock dropping to zero 6 months later. You guessed it, it was Bre-X. Many of my subscribers listened to the “news”, to stories and did not sell. Later they pleaded for advice as to how to get some of their capital back. You gamble, sometimes you win, sometimes you loss. Don’t cry.

As you might have guessed, I enjoy the speculative side of the gold market. Maybe this became ingrained in my mind after working underground in a small gold mine in Canada’s Northwest Territories during my youth (I’m not crazy enough to do it in my old age). Let me close this section on speculating/gambling with a little story about the successful “investor” and the failed “speculator”.

The conservative “investor” did not speculate. He bought good quality stocks and invested for the long term. His goal was to make 10% on his investment capital. He succeeded and made his 10%.

The speculator had a higher goal. His goal was to make 100% speculating. He did adhere to the “take small losses and let profits run” concept. And there WERE losses, but also profits. In the end he failed in his goal. By the end of the year he only reached the 80% profit level.

Which would you rather be, the successful “investor” or the failed speculator?

When I start typing these commentaries I’m never sure where I will end up. Next week, back to the normal commentaries and away for “stories”.

METALS and ENERGY

Gold: See analysis above.

Silver: Continues its lateral trend inside that $6.90/$7.60 band. Upside break from a month long small lateral band but break is somewhat weak and needs reinforcement.

Palladium: Month long rally with a few hick-ups but longer term seems to be more lateral than anything else.

Platinum: Rallying sharply towards the upper trend line of a gently up sloping channel. Should hit the trend line at about 910 and we’ll see what happens next.

Copper: Continually making new highs but with restricted volume activity. Stay with the trend but be quick to get out on a reversal. Trend may be near a resistance trend line at the 166/167 level.

West Texas Light Sweet Crude: Still within a long term bull but seems to be getting weaker as it tries to make new highs. Volume action disappointing. $62.50 needed to show some strength while $55.50 would show serious weakness.

Natural Gas: Continues to move higher but the price momentum is showing serious negative divergence versus the price action. Be prepared for some reaction, possibly back to the $6.00 area.

Heating Oil: Although everything seems okay we have a negative divergence in the price momentum shown at the recent price highs and more interestingly, a Merv’s FAN Principle bearish trend lines with the third trend line not far below recent price action. A move to 1.65 would break below this trend line for a short term bear confirmation but it would take 1.59 to break below well established support.

Unleaded Gas: As with most energies, showing a negative divergence at recent highs and disappointing volume activity. A head and shoulder pattern is also forming with a move to 160 required to break it.

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.