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Gold Rally Disintegrates on Friday

Commodities / Gold and Silver 2010 Mar 21, 2010 - 04:26 AM GMT

By: Merv_Burak

Commodities

Best Financial Markets Analysis ArticleFour up days almost all disintegrated in one day.  We seem to be getting too many sharp down days over the past few months, or is that just an illusion?


GOLD : LONG TERM

From a long term standpoint we are in a holding pattern basically moving sideways.  The long term P&F chart remains bullish while the indicators have not changed from last week.  The price of gold remains above its positive sloping moving average line and the momentum indicator remains in its positive zone.  The indicator has been moving above and below its trigger line for months now and has once more dropped below the trigger.  The trigger itself is now pointing downward.  The volume indicator continues to track a basic lateral path and as of Thursday remains above its positive trigger line.  Once Friday’s volume action is known it most likely would move the indicator once more below the trigger line but we’ll have to wait for the data.  The long term rating remains BULLISH.

INTERMEDIATE TERM

Gold dropped below its intermediate term moving average line last week, moved above the line this past Tuesday and now dropped below the line once more on Friday.  The moving average line itself turned up for a few days this past week but turned back to the down side on Friday.  The momentum indicator has been sticking very close to its neutral line for a few months now.  As of Friday it remains just very slightly above the line in the positive zone but heading lower.  It has dropped below its trigger line and the trigger has turned downward.  The volume indicator remains above its positive trigger for now, not having Friday’s volume activity yet.  The intermediate term rating today is BEARISH.  Until such time as gold finally makes a concerted move I see this rating changing back and forth between bullish and bearish.

SHORT TERM

The short term chart looks very interesting today.  Note the area boxed off.  This is the area since the low in early Feb.  What we see are two separate patterns.  First, one may see a head and shoulder top pattern.  I usually like to see the neckline, at the head location, at no less than half way towards the top of the head from the rally start point.  I like to see a reasonable bull move leading into an H&S pattern.  Just a little quirk of mine.  The neckline here is at a level LESS than half way to the top of the head from the rally start point.  However, the pattern is so well defined that one might overlook this little quirk and go with the pattern.  As such the pattern has not yet been broken and no reversal signal has yet been given.  That would take a move to below the 1100 level.  Once a bear signal had been given, understanding this is a short term pattern, the projection would be to the early Feb lows.

          

The other interesting pattern that we see is a short term FAN PRINCIPLE trend lines.  These can be defined as Decelerating Bearish Fan Lines as they indicate a slowing down of the up trend resulting in a bear trend once verified.  The confirmation of a trend reversal would come at about the same point as the confirmation of the H&S break-out would come. 

With two patterns suggesting the same thing it looks like the next few weeks may not be all that great.

As for the normal indicators, the price moved above the short term moving average line during the week but didn’t stay there long.  It’s back below the line and the line slope has turned downward.  The momentum indicator has once more dropped below its neutral line into the negative zone.  It is also below its negative trigger line.  As for the daily volume activity, that has been below its 15 day average volume all week, including during the early week up days, suggesting weakness in the earlier up move.  The short term rating is BEARISH.

As for the immediate direction of least resistance, I will go with the flow and take the downside.  Gold has closed below its very short term moving average line and the line has turned downwards.  The aggressive Stochastic Oscillator has turned down and moved below its trigger line although the trigger is still pointing upward and the SO itself is still slightly inside its positive zone.  Gold is above support from both the H&S neckline and the third FAN trend line but I think both will be breached very early in the week.  If these supports are not quickly breached then the odds turn to the up side.

SILVER

          

Although both gold and silver generally trend together there are often differing short term trends that imply greater or lesser strength in one commodity versus the other.  The Relative Strength (RS) ratings in the Tables of Technical Information tells us the story of which is acting better for each of the time periods.  However, this does not really tell us the whole story and one must still go to the charts to see directly.  The short term RS ratings are wide apart between these two.  A chart comparison shows the story.  While gold is back to its mid to late Feb price level silver is still far above its similar level.  While gold is reacting to a failed rally attempt silver is reacting from a normal rally high.  There are, however, similarities between the two that requires caution.  The volume action in silver has not been all that great and although there are commodity expiration dates that affect the volume action this latest low volume level is not encouraging.  The momentum indicator is very weak and ready to go negative, ahead of the price giving us any reversal notice.  The Stochastic Oscillator has given us a negative divergence warning as the price made new rally highs this past week.  This does not necessarily predict a reversal for the price trend ahead but it does give us a warning not to be surprised is the price should continue to drop to lower levels ahead. 

As for the ratings this week I would follow those in the table.  Understanding that the ratings may differ slightly when viewed using my normal indicators in the charts the short term ratings are especially prone to difference due to the short time span used and the use of weekly closing prices versus daily prices.  Using the charts I would rate the long term as still in a BULLISH phase and the short term as already BEARISH or at best, - Neutral.

PRECIOUS METAL STOCKS

          

Those who follow the major North American Gold Indices may not be getting the full story of the super performance that has been made by gold and silver stocks during the recent bull market.  The major North American Indices did not bottom out and start their bull markets until very late 2000.  The PHLX Gold/Silver Sector Index gained 300% from its bottom low to Friday’s close.  The NYSE (AMEX) Gold BUGS Index gained 1060% from its bottom low to Friday’s close.  The AVERAGE performance of the 160 component stocks in the Merv’s Gold & Silver 160 Index gained 7650% from its bottom low in late 1998 to Friday’s close.  Quite a performance difference.  The difference is, of course, the greater number of speculative stocks in the Merv’s 160 Index.  The performance of these speculative stocks is almost always far superior to most of the quality stocks that are the major components of the North American Indices.  Another interesting performance comparison, the prior gold stock bull market ended in 1996.  The PHLX Index is only a very few % points above that previous high while the Merv’s 160 Index is 2370% above its previous 1996 bull market high.

Most gold stock investors watch the performance of the PHLX or Gold BUGS Indices. There are many analysts who mention individual stocks and the superb performance of such individual stocks but most investors do not understand the great profits to be made in gold and silver stocks of the more speculative variety.  Yes, these stocks have a habit of losing most of their value at times but that’s why we have technical analysis to get you out of the losers before you end up with large losses.  Losses in any stock is almost inevitable but why sit there taking them when you can exit the stocks with minimal loss and go to something else. 

Did I mention that sharp bear drop of 2008?  The PHLX Index dropped to within 50% of its previous 2000 bear market low.  The average stock per the Merv’s 160 Index dropped to no where near that (as you can see on the chart).

The week was a mixed week with most Indices up or down by only fractions of percentages.  Unfortunately it looks like the various Indices are in topping patterns after several weeks of rally.  The next few weeks are going to be interesting to watch which way the stocks go.  Are we in for new highs or are we in for another leg of a bear market? 

The year long RSI momentum indicator shown in the chart suggests continuing weakness behind recent moves.  Since the early 2004 high, each succeeding Index high was accompanied by a lower high in the momentum indicator.  This suggests the strength in each new move to be weaker than the previous move.  Sooner or later this results in the strength going negative and a serious bear move in progress.  This is not inevitable but the odds may be in that direction. 

In my view this is not the time to become too aggressive in your stock activities.  If you must be in the market make sure you have your exit strategy fully operational and get out fast when it tells you to.  Procrastination when the market turns on you is the recipe for huge losses.

Merv’s Precious Metals Indices Table

Well, that will be it for this week.

By Merv Burak, CMT
Hudson Aero/Systems Inc.
Technical Information Group
for Merv's Precious Metals Central

For DAILY Uranium stock commentary and WEEKLY Uranium market update check out my new Technically Uranium with Merv blog at http://techuranium.blogspot.com .

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 http://preciousmetalscentral.com . There you will find samples of the Indices and their component stocks plus other publications of interest to gold investors.

Before you invest, Always check your market timing with a Qualified Professional Market Technician

Merv Burak Archive

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