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

Gold tried to stage a rally towards that upper down-trending channel line (see previous mid-week chart), but to no avail. Down it went into new reaction lows. That support at the $411.50 level looks more important as time goes by, but will it hold? That is something that we will have to wait and see when the time comes. You get no fortune cookie predictions here.

Long Term: The long-term point and figure chart continues to be bullish, but as mentioned previously, this may be more of a VERY long-term chart rather than just a simple long-term chart. What is the distinction? Hell if I know. It’s just a good excuse to get away from the fact that it is still bullish and almost all of my other indicators are bearish. How else to explain it.

As for the normal array of indicators, gold is below its negative sloping moving average line with a price momentum that is just about to enter the negative zone. Looking back at the chart, the previous two times that this momentum indicator was just entering its negative zone was as it was bottoming in May of 2004 and April 2003. This might cause a lot of smiles for the bullish gold bugs as it indicates we are VERY CLOSE to a major bottom with a new major bull just ahead. However, the previous occurrences were during a basic bull market in gold. Are we in a basic bull market? That is the question right now. If the P&F is correct, we are still in one. If all the other indicators are correct, we are entering a major bear and the momentum is just in a transition phase going from positive to negative. Again, I prefer to wait and have the market action confirm a new bull rather than go gung-ho claiming so. Let others claim to be the first to predict the coming new bull.

Intermediate Term: Now for the intermediate term. The last confirmed signal from the P&F chart is still the bearish one, projecting to the $395 level. It needs $450 to reverse the signal, at this time. I say “at this time” because subsequent action could cause more up-and-down action on the P&F chart, thereby causing a change in breakout levels. Gold is also below its negatively sloping moving average line with a negative price momentum. Volume indicator is also negative having recently broken below a 3-month gentle uptrend line and moving average line. The only positive, if you can call it that, is the support at the $411.50 level of the Feb lows. Bearish is the only word here.

Short Term: The short-term P&F chart shows clearly the continued bearish trend. Although projecting to the $400 level, it is expected to halt or at least take a rest at that $411.50 support. As for the rest, gold is below its negatively sloping moving average line with a price momentum deep in its negative zone. The momentum is at the point of entering its oversold zone. Again, as with the long term, looking back at the chart one sees that there are several times that the momentum was at this level. Each time a rally occurred, including the ones from the bottom in 2004 and 2003. So, one gets more indication of a rally not too far away. Volume, however, is still the weak indicator and needs to strengthen for any potential rally to be significant. Still bearish, but expecting a rally soon.

As for the aggressive Stochastic Oscillator, it is continuing in its upward trek within the negative zone. It does look like such trek may be ending, but that must await Monday’s action to know. In the meantime, it is suggesting that the Friday downside move may not last.

U.S. DOLLAR INDEX

Long Term: The trend continues stronger. The US$ Index is above its positively sloping moving average line. The price momentum is, for the first time since April of 2002, entering the positive zone and all seems well with the world. I let others speculate as to why this is happening. I just report the happening. Bullish on the long term.

Intermediate Term: With a projection to 94.50, the intermediate-term P&F chart is as bullish as they come. All the other indicators are confirming such positive prognosis. Nuff said. Bullish on the intermediate term.

Short Term: Short-term indicators and charts are all positive without any indication, yet, of any end to the trend. Bullish here, too.

GOLD & SILVER INDICES

The sharp bounce in the North American Gold Indices didn’t last long. By Friday, they were back on their way down. But if one looks a little deeper into these Indices and especially some indicators, one might get some encouragement.

Shown this week is the PHLX Gold/Silver Sector Index along with one of my indicators, which I just call Merv’s Intermediate-Term Momentum Indicator, for want of a fancy name. The interesting feature here is the bottoming process that the indicator is going through. As the Index is making new lows, the indicator is flattening out. We saw the same thing last January, just before the rally in the Index. Going back in time, this flattening process could be seen just before the market reversals at the bottoms in May of 2004 and April of 2003. The indicator has not yet turned up, so there could still be a few weeks before the turn, but it does look encouraging for a rally, or maybe even a trend reversal, sometime in the not too distant future.

Another potential positive sign that we are near a rally is the positive divergence in the action of the Indices versus that of gold. Although gold ended lower on the week, most North American Indices ended higher on the week. The exceptions to this were most of the Merv’s Indices, which did close the week on the downside. Just something to think about in the days ahead.

METALS and ENERGY

Not a single positive rating in the metals and energies. These commodities do not look like they are ready yet to turn around and go bullish. If the commodities are moving lower, how do we expect the stocks based upon the commodities to act any different?

Looking at the chart of West Texas Crude Oil, we see the downtrend progressing. I had previously suggested that oil may have seen its highs and the future was towards lower prices. So far, so good. As long as oil stays within that down trending channel or below its intermediate term moving average line, there is nothing one can do but wait.

Shown this week with the chart is, again, Merv’s Intermediate Term Momentum Indicator. One can see what looks like the indicator starting to bottom out, as was shown with the PHLX Gold/Silver Sector Index. Unfortunately, this indicator has not yet reached the negative level from which such reversal would have a major impact. Although it looks like it is in the very initial stages of flattening out ahead of turning up, it could be just a short rest and then continue lower. Give this indicator some more time before we jump on its message. Maybe in a week or two, it will be clearer.

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.