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.

Well let’s see. The North American markets are lower, the European markets are lower, the Asian markets are lower to neutral, the currencies (except for the Cdn $) are lower but the metals and energies are higher. Something must be going on out there.

GOLD

Looking at the long term P&F chart we see the validity of this latest upside break after a several month sideways motion. As mentioned previously the P&F chart gives us projections for this move to the $560 then the $600 levels.

The chart this week is the long term weekly chart which also shows the break very emphatically. This chart also shows a 40 week RSI price momentum indicator. Here we see a steadily decreasing peak momentum since the high in Jan of 2004. So far the momentum has not yet exceeded its previous late 2004 high to negate this pattern. Moves that continually make higher price highs but not higher or equal momentum highs are very likely reaching their tops. It’s not that the momentum has gone negative, yet, but one cannot have a continuing bull market with continually weaker price strength. At some point that strength will go negative, and so will the price. So, we should hope for continued improvement in the momentum and negate this decreasing feature.

The long term popular moving average line has once more turned up after a very brief fling with the negative slope. It is still mostly horizontal (but oh so slightly positive) and one would be far more comfortable when the slope becomes more aggressively positive.

For now, what can I say but BULLISH on the long term.

From the intermediate term P&F chart you can quickly see where my calculated projection of an intermediate move to $545 came from. By counting the number of columns across the row where the final column break-out occurred we get 13 columns. Multiply this by $5 units and then by 2 (unit reversal) we get a move of $130. Add to this the lowest price in the consolidation zone ($415) and we get our $545 projection. We are into a slight reversal of direction at this time but one should expect that this direction should find support at the previous resistance level, at the $455 level. One interesting feature shown on the P&F chart is the support turned into resistance line. The latest price move reacted lower after touching the extension of the previous up trend line. It is not uncommon for a previous support trend line, once breached, to become a resistance line. This, for both bar and P&F charts. Don’t expect it all the time but it does happen often enough to watch for.

Looking at our normal indicators we see that price momentum is acting very positively. Here we DO have a higher peak versus the peak during the previous price high in early last Dec. So, from an intermediate term standpoint we do not have that worry of diminishing momentum we have in the long term. The On-Balance Volume (OBV) indicator, my preferred volume indicator due to its simplicity, is in a very positive mode and well into new high levels. As for the moving average line, it is quite some distance below the recent action and pointing aggressively upwards.

All in all, BULLISH on the intermediate term.

NORTH AMERICAN GOLD INDICES

Each week I look in on one of the major North American Gold Indices. There are only about 4 of them. There are many other lesser Indices such as the Dow Jones Gold, Silver & Platinum Index shown last week but these are little known. The main Canadian gold Index is the S&P/TSX Capped Gold Index, a coordinated effort between Standard and Poors and the Toronto Stock Exchange.

S&P/TSX CAPPED GOLD INDEX

As one can see, this Index has done nothing for the past 4 years. This is primarily due to the heavy weighting that Barrick Gold and a couple of other stocks have on the Index value calculation. An exchange Traded Fund (ETF) based upon this Index trades on the Toronto Stock Exchange. Its performance simulates this Index and is nothing to write home about. Barrick has been acting positively lately and is on my recommended “quality” gold stock list but is not my first choice in that group. We’ll have to wait until the Index breaks through into new high ground before we can expect any significant performance here. Not the Index to follow if you are a gold bug.

MERV’S PRECIOUS METALS INDICES

Interesting developments within the universe of 160 stocks that I follow and are represented in my various Indices. The gambling variety of stocks are starting to show their meddle versus the quality. This has not happened for some time and is an event I have been looking forward to. One week does not a trend make so we need to keep an eye on this development. Once the gambling stocks take hold we are likely to see terrific gains in many of these stocks. For now, the gains are only in a select few.

MERV’S GOLD & SILVER 160 INDEX

Along with most other North American gold Indices the Merv’s Gold & Silver 160 Index closed down on the week, but only a fraction. While most Indices closed down anywhere between 1% and 3%, this Index closed down only 0.6%. What is at play here is the improvement in the speculative and gambling variety of stocks (see Gamb-Gold Index write-up). We still had a majority of stocks on the decline but when you look at the percentages, the advancers had a greater percentage here than those in the Qual-Gold section. This may be the start of a movement towards the more speculative stocks.

MERV’S QUAL-GOLD INDEX

After being the star performer in the Merv’s groups of Indices the Qual-Gold Index has now out performed on the down side. With 23% advancing stocks and 77% declining it wasn’t exactly a route but still overwhelmingly negative (see the percentages for the Gamb-Gold Index below). The Index action itself remains in a wide, slightly negative, channel. The action since May has been quite bullish and a rest or minor reaction was to be expected. How long this rest will last or how deep the reaction still remains to be seen but from the indicators one is confident that the bull move has not seen its last days yet. If the gold P&F projections are any guide then this Index still has a long growth ahead.

MERV’S SPEC-GOLD INDEX

With the speculative stocks being almost by definition in between quality and gambling, one is not surprised when their performance is likewise in between the two. 43% advancing stocks and 57% declining this is almost a standoff during the week. However, the negatives were enough to give the Index that 2.2% loss on the week. Although the Index crossed its down trend line from over a year ago it has not yet moved with enthusiasm. It is just resting on top of the line. Possibly the level of the previous highs is more important and a greater resistance than the trend line was. We should see much better performance from this group in the weeks and months ahead as this group, like the gambling stocks, are prone to huge gains once they get going.

MERV’S GAMB-GOLD INDEX

Ah! Here we get into the gambling stocks, those stocks everyone wants to jump on for the 10 bagger gains but few are willing to admit ever buying. Unlike the other Merv’s Indices, or the major gold Indices in general, the Merv’s Gamb-Gold Index had a gain on the week and a very respectable 4.2% gain. Although we did have a few great winners to move the Index (3 stocks with gains greater than 30% and no losers of that magnitude) we also had many more advancing issues than decliners (50% advancing and 43% declining). This is just the opposite of the other gold Indices. It looks like the long awaited move in the gambling variety of stocks is just getting started and much, much more upside lies ahead.

This is still early in the gambling game so anything can still happen but the REAL gains are made by those that do get in early, take the added risk and go for the gold ring. As I always recommend, one should always have their stop loss fixed BEFORE buying so as to protect capital from unexpected surprises. A good example of this was illustrated with one of my recommendations in Merv’s Precious Metals Central. St. Elias Mines was bought @ $0.37 in June. After a sharp advance the stop loss was raised to $0.60 and quickly stopped out for a 62% gain in 3 months. It had subsequently dropped another 50%. Better to have the cash in hand than to pray and hope for a subsequent recovery. During the wait you could be putting the cash to better use, like my Crosshair Exploration recommendation @ $0.48 which has almost doubled in two weeks. Such is the action in this gambling group.

NON-EDIBLE FUTURES

METALS

Gold: See analysis above.

Silver: The sharp rally after the bear break a few weeks ago has been on low volume activity, not conducive to a trend longevity. It seems to have topped out and may be on its way down again.

Palladium: Except for a couple of one day spikes Palladium has been in a lateral trend between 180 and 210 for the past 9 months. It’s getting boring.

Platinum: Couldn’t hold new highs. Volume action and momentum not too enthusiastic. Looking weak.

Copper: Inability to make new highs troubling. Looking like a potential bearish double top pattern but copper continues to surprise.

ENERGY

The market action in the Energy sector does not yet seem to take into account the full potential effects of hurricane Rita. The following comments could therefore change on a moment’s notice should speculators suddenly get into the action, either up or down.

West Texas Light Sweet Crude: Oil price lower than before Hurricane Katrina, who would have believed it? Momentum very weak and volume no great shakes. A move into new highs very soon would be a surprise with these technicals.

Natural Gas: Since last breaking above the short term moving average line and turning the line slope upwards (on 28 Jul 2005 @ $7.694) it has been up, up and away. The recent “gap” looked like a “break-away” gap but the trend can’t stay this strong for much longer without a decent rest period, or even a short term decline. Watch for that gap to be tested again.

Heating Oil: Still trapped inside that FAN, between the FAN trend line 2 and 3. Next few weeks may be more lateral than anything else.

Unleaded Gas: Recent bounce does not appear strong but the previous drop was even weaker. We could still see a further rally here but with the energies in general weak such weakness might have its effect here.

CURRENCY

Australian Dollar: Four months and can’t make any headway. Negative momentum, neutral volume, price below moving averages. Not an encouraging scene.

British Pound: Broke up trend line and then support. Now it is heading back towards previous lows. Will it hold above the 1.72 level?

Canadian Dollar: P&F chart is projecting the Cdn $ to the $1.01 level versus the U.S. $, almost even money. It hasn’t been there since, oh about Nov of 1976. Despite the projection it is just about time for the Cdn $ to take a well deserved rest or even a minor reaction to gain strength for its next move.

European Euro: Well, it had a nice run since the bottom in 2002 but all good things come to an end. The Euro just hasn’t been able to gain any steam lately, maybe the German elections has something to do with it. For those who like proportional representation, Germany is a good lesson of what could happen. The Euro needs to halt its slide at the 1.19 level or else it could head all the way back to .85

Japanese Yen: The Yen has been sliding all year. It needs to overcome that .92 barrier if it ever intends to gain some altitude.

Mexican Peso: Since calling the top in Aug the Peso has been moving step by step into lower territory. The process continues.

Swiss Franc: P&F upside break in Aug confirmed in early Sept now nullified in late Sept. Not all P&F moves are correct. We’ll have to see how the Franc does around the .77 support area.

U.S. Dollar Index: P&F chart is suggesting a new bull move in progress pointing to new highs ahead. Volume and momentum seem to be confirming the move. Maybe the minor reaction is over. Again, it might be the German situation that is weakening the Euro more than the U.S. $ is strengthening.

INDICES

It should be noted that the comments in this section are based upon the actions of the Indices futures market and not upon the actions of the respective Indices themselves.

Dow Jones Industrial Average: Not being able to break into new highs the Dow futures continue in their wide lateral trend.

Nikkei 225 Index: There still seems to be no stopping the upward trek of the Nikkei Index futures.

NASDAQ 100 Index: Previous higher highs and lows seems to be changing into lower highs and lows.

Russell 2000 Index: The Index futures seem on the verge of going negative with momentum just about to move below its neutral line. The volume indicator is already making lower lows.

S&P 500 Composite Index: Sharp negative volume action may be pulling the Index futures down. The market action does not look encouraging.

FINANCIALS

Eurodollar: The plunge in the value of the Euro Dollar continues. May be heading back to the 93 level where is has very strong support.

Federal Funds 30-Day: Continues to slowly head lower and nothing yet to stop it.

Treasury Notes 2-Year: Support at 103.2 seems to be holding, so far.

Treasury Notes 5-Year: Looks like it’s heading towards its previous lows at 106.6.

Treasury Notes 10-Year: All indicators are negative. Seems to be heading back towards previous 109.8 lows.

Treasury Bonds 30-Year: Needs upside volume action improvement before it can stage a good rally.

A free tutorial on getting the most from the Indices and futures tables can be found on the www.themarkettraders.com frond page in the Global Indices section.

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.


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