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Gold, WOW! That Was Some Week

Commodities / Gold and Silver 2010 Dec 05, 2010 - 05:58 AM GMT

By: Merv_Burak

Commodities

Best Financial Markets Analysis ArticleWOW! That was some week.  Gold at new closing highs (but not intra-day highs) and silver going gung-ho.  But wait, what’s this?  Relatively low volume, for both, on this recent move.  Could this be a fake move?  Who knows but it is something to think about.


TECHNICAL ANALYSIS – SCIENCE OR ART?

This is a question that often comes up in industry circles.  I have met technicians on both sides of this issue and fundamentalists who think it is no better than fortune telling.  I’m sure it will probably never be resolved to everyone’s satisfaction.  This is only my personal view but I consider technical analysis an art form.  As a Consulting Aerospace Engineer, in that industry for almost 50 years, I guess I can appreciate “science”.   To me, science, the kind involved in aerospace engineering, involves concrete precise criteria with consistent answers to identical situations.  Take an aircraft wing.  If you apply enough force on the wing it will break.  Using the exact same wing and applying the same force you will keep getting the same result.  Even when you have a variety of forces acting on the wing at some point it will break.  Apply the same variety of forces to an identical wing and it will break again.

I have been in the technical discipline for over 40 years, for the past 18 years certified as a professional (this, of course, required basically working at two jobs at the same time).  I have yet to find a single “force” or combination of “forces” that operate in the stock market and provide the same result each and every time these forces are applied.  There are criteria that give us odds of a response but only odds.  As odds you cannot get 100% reliability.  You are lucky to get 70% to 80% reliability.  That is an art form not “science”.  To assess the “force” or “forces” and to try and determine what the result might be depends to a great deal on the ability of the artist.  This is an art form and the results depend upon the training, expertise and luck (yes, luck) of the artist.  Not every artist is a Michelangelo and even he, I’m sure, had his off days.  One should never expect perfect results from a technician, or from a fundamentalist, and therefore should ALWAYS be prepared for unanticipated results, to protect capital.

GOLD : LONG TERM

As one can guess, with a week like the last one the long term remains unchanged.  The price of gold remains above its positive sloping moving average line and the long term momentum indicator remains in its positive zone above a positive sloping trigger line.  The momentum indicator has not quite exceeded its peak from earlier in Nov but another positive day should do it.  The volume indicator continues to move in new all time high ground and well above its positive trigger line.  All in all the long term rating remains BULLISH.

INTERMEDIATE TERM

The intermediate term indicators are giving us the same message as the long term.  Gold remains comfortably above its positive sloping moving average line and the intermediate term momentum indicator remains in its positive zone above a positive trigger line.  As with the long term the intermediate term momentum indicator has not made a new high and is lower than the highs of Oct and early Nov.  Diminishing momentum needs to be resolved.  The volume indicator continues positive and above its positive sloping trigger line.  BULLISH is the only rating I can give the intermediate term.  The short term moving average remains well above the intermediate term average for confirmation of this bull.

SHORT TERM

          

So, do we still have a potential head and shoulder reversal pattern?  I would say so although it is very close to getting nullified.  Although the Friday close is at a new closing high the intra-day high has not quite made it into new high territory.  One more day and it might be there but today it didn’t quite make it.  The pattern is not a perfect H&S pattern but perfection is rarely available.  You go with what you got.

At the Friday close we still have a lower low and lower high situation in the momentum indicator, opposite to what the price is giving us.  The momentum indicator is suggesting weakness in the price move but here again it may take only another strong up day for the momentum to break that scenario and move above its previous high.

Where I differ somewhat with the “bible” of the technical discipline is in the requirement that the volume at the head location of the H&S must be lower than the volume at the left shoulder.  I have seen too often volume increasing up to the top of a trend.  It is important that the volume decrease sharply at the right shoulder, however, and that does seem to be what we have here.

The “bible” mentioned above refers to the technician’s premier source of information on technical market action.  That is the book “Technical Analysis of Stock Trends” by Robert D. Edwards and John Magee.  This book was first published in 1948 and I use the 5th Edition published in 1966 (you get only the latest most modern information here).  This book is still available in book stores but I’m not sure what edition it is up to by now.  Most of my technical books are no newer than the late 1960s.  Once into the 70s and 80s the books became just too darn computer oriented and sophisticated for me and besides, technical patterns and indicators are based upon investor/speculator trading and that hasn’t changed since the early part of the previous century.  Just as an aside if I was to recommend just one book for a speculator to read it would be another book by John Magee called “The General Semantics of Wall Street”.  This book was first published in 1958, my edition is the 1967 edition.  In my view it is better than the most often recommended book “Extraordinary Popular Delusions and the Madness of Crowds” by Chares Mackay, first published in 1841, yes that’s 1841 (my copy is more modern, a 1970 version).  It’s a very good book but the Magee book is far easier to read and the lessons are easier to understand.  But I have digressed too far already.

The “bible” does have a chart example of a failed H&S pattern (Figure 13, page 55 of my copy) not unlike what we have here.  Since these patterns do not always go as expected is the reason I call them POTENTIAL patterns until their break-out verification.  For this gold pattern that would not come until a break below the neckline.  Until then this is not really a head and shoulder but a potential head and shoulder pattern.  It should be emphasized that this gold pattern is a short to intermediate term pattern and NOT a long term pattern.  If confirmed by a neckline break it is always possible to end up into a long term trend but the pattern is developed over a short term (as most of the examples in the “bible” are) and that should be the initial focus.

Getting back to the real world the market action this past week was nothing to complain about (but I’ll try to see if I can).  We have the price of gold trading above its positive sloping moving average line.  The short term momentum indicator remains in the positive zone above its positive trigger line.  So far, so good.  The momentum indicator has, however, been getting weaker and weaker over the past few weeks.  The daily volume activity is not all that great either.  During the week we have seen relatively lower volume action versus recent daily volume.  This, as the price is rising, is not a good sign.  Keeping in mind this volume warning and the warning coming from the momentum indicator the sum of the indicators still gives me a BULLISH rating for the short term.  The very short term moving average line remains above the short term average line for present confirmation of this bull.

As for the immediate direction of least resistance, I will continue with my cop-out direction, the lateral direction.  Not shown this week is the Stochastic Oscillator.  It entered its overbought zone on Thursday but turned lower on Friday, still very slightly in the overbought zone.  We need a strong gold showing over the next day or two or else many of these more aggressive indicators and patterns might just go belly-up (i.e. plunge lower).

Time constraints again this week.  Commentary on silver and the precious metal stocks must wait till next week.

Merv’s Precious Metals Indices Table

Well, that’s it for this week.  Comments are always welcome and should be addressed to mervburak@gmail.com.

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

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