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Gold Rally Negates Bearish Head and Shoulders Price Pattern

Commodities / Gold and Silver 2011 Jul 17, 2011 - 10:28 AM GMT

By: Merv_Burak

Commodities

Best Financial Markets Analysis ArticleGold shot up during the week nullifying the previous (weird) head and shoulder pattern and moved into new highs.  All speculative time periods are showing positive trends.  What else is there to say, but I guess I’ll have to find something.


A LITTLE RANT

A reader of these commentaries emailed the other day with some criticism.  These are always welcome as they may highlight things that I can change to improve my weekly commentaries.  With his email this reader highlighted the writings of another commentator so I thought I’d see what that other commentator was talking about.  There are hundreds of us on the internet with hundreds of different viewpoints.  What a bunch of c--- in that commentary.  So many errors, so much crap, so little time to correct.  I don’t know exactly what that commentator had against technicians, after all no one is perfect, but he sure lambasted that discipline with so many errors or outright false statements that I was going to write a rant trying to correct him on many of his statements.  After thinking about it for some time I decided that I’m too old to get into any controversy.  I would, however, like to correct one misconception he wrote about (either he was misunderstanding technicians or was just outright lying).  It is a misconception that is often written about technicians by non-technicians.

Almost all technicians use some sort of momentum indicator in assessing securities and markets.  These could be the most popular MACD, the slightly less popular RSI or any of dozens of indicators that could be lumped into a general definition of a momentum indicator.  I’ve been in this field since the mid-1960s:

I KNOW OF NO TECHNICIAN WHO USES A MOMENTUM INDICATOR AS HIS SOLE BUY OR SELL INDICATOR. 

All technicians that I have come across use momentum indicators as one of the indicators towards a final buy/sell decision.  Depending upon what the other indicators are saying the momentum indicator, at times, could be the final nail that activates a decision but it is not the SOLE indicator used.  Most often momentum indicators provide technicians with ADVANCE WARNING of a possible change in trend.  A technician would then most likely concentrate on his other indicators to give him that final buy/sell signal.

Momentum indicators are probably the most misunderstood indicators used by technicians.  Very often when someone mentions momentum (especially if a fundamentalist does) I have no idea what he is taking about, unless he has defined his understanding of the term (earnings momentum, price momentum, volume momentum, sales momentum, etc.)  At least a technician usually refers to price momentum.  Most technical indicators that can be lumped into the general definition of momentum are price momentum indicators, although some can be used with volume.  What else is there from a technician’s point of reference but price and volume?

I guess I ended up with a rant.  Oh well, chalk it up to old age.

GOLD

LONG TERM

Nothing has changed from the long term perspective.

Trend:   Gold remains trading well above its positive sloping long term moving average line.  The price moved into new all time highs during the week but the break into new highs was not enthusiastic.  Usually, a break into new highs, if during a strong bull market, would result in a dramatic upside move following the break.  We don’t have that here so one would be cautious as the implication may be that the move was not a strong one, or even a false one.

Strength:  The long term momentum indicator continues to move in its positive zone above its positive sloping trigger line.  Here too the indicator is trailing the momentum of previous moves.  So far the move into new highs has been on decreasing momentum.  This IS NOT a sell indication but is a cautionary sign.

Volume:   The volume indicator is the strongest of indicators on the up side.  It continues to zoom higher into new high territory above its long term positive trigger line.  This indicator is showing more strength than is the price or volume indicators.

As of the Friday close the long term rating remains BULLISH.

INTERMEDIATE TERM

Changing the indicators into intermediate term indicators everything mentioned above for the long term can be said about the intermediate term, so I wouldn’t go repeating myself.  The one extra indicator I look at from the intermediate term is the position of the short term moving average line relative to the intermediate term line.  The intermediate term rating remains BULLISH.  This is further confirmed by the short term moving average line trending higher above the intermediate term line.

SHORT TERM

The past week was all on the up side for gold.  The trend can’t continue without a breather but when will it come.  Even a breather would be of short duration from the present indicators.  I would suspect short term traders are getting a little hesitant to jump in at this time and are probably waiting for a correction to jump back in.  Still, as of the Friday close the short term position of gold continues to be positive, although the lack of upside enthusiasm has been noted above.

Trend:   Gold continues to move above its positive sloping short term moving average line.

Strength:   The short term momentum indicator remains well inside its positive zone and above its positive sloping trigger line.  We do see the indicator in the process of turning but the turn has not yet been completed and one should not assume that just because the turn towards the down side has started that it will be completed.

Volume:   The daily volume action, unlike the volume indicator, is not showing any great enthusiasm for the gold up side.  It may just be a cycle thing or it may not.  If gold was truly very bullish then speculators would come out of the woodwork in great numbers and overcome any cycle effects. 

Despite any caution shown by the indicators the position of gold at the Friday close remains BULLISH on the short term.  The very short term moving average line is confirming this bull by trading above the short term moving average line.

With all those positive ratings what can we expect from the immediate future?  Well, there is only the slightest hint that the next day or two will be bummers, but there is some indication.  The Friday price activity seems to have stalled although gold did end on the up side.  The Stochastic Oscillator is in its overbought zone but it could stay there for some time.  One waits for the SO to drop below its overbought line as an indication that maybe a reversal of trend is ahead.  I will go with the lateral trend for the next day or two until the dust clears up a bit.

SILVER

Percentage wise silver is once more providing better performance than gold, at least for the last week or two.

LONG TERM

Trend:  On the Friday close silver was budding its head against that upper resistance level shown in last week’s P&F chart.  A move to the $40 level will be a long term P&F break-out.  In the mean time silver remains above its positive sloping long term moving average line.

Strength:   The long term momentum indicator is in its positive zone and above its positive sloping trigger line but is not really showing strength versus previous moves.  The indicator is still below its highs from the past several weeks of activity while the price is getting ready for a break-out.

Volume:   The volume indicator is showing strength but not to the degree that the gold volume indicator showed.  The indicator is, however, above its positive trigger line.

As of Friday close the long term rating remains BULLISH.

INTERMEDIATE TERM

Trend:   Silver had remained below its negative sloping intermediate term moving average line since the May plunge but on Wednesday it crossed above the line and on Friday the moving average line turned very slightly to the up side.

Strength:   The intermediate term momentum indicator has moved into its positive zone and above its trigger line.  The trigger has also turned to the up side.  Despite this the indicator is not really showing that much strength in the price move versus previous bullish moves. 

Volume:   The volume indicator is trending slightly from the lateral towards the up side.  It remains slightly above its positive trigger line.

On the intermediate term the rating is now BULLISH with the short term moving average line just inching above the intermediate term line for confirmation.

SHORT TERM

 Trend:   The short term trend appears quite positive with silver above its positive sloping moving average line.  Silver closed at new 2 month highs but could use just a little bit more upside to break that P&F resistance level.

Strength:   Unlike the intermediate and long term momentum indicators the short term momentum indicator is showing significant strength versus previous rallies.  It is in its positive zone and above its positive sloping trigger line.  In addition, although silver itself is just barely above its previous recent highs the momentum indicator is already some distance above its previous highs.

Volume:   Unlike the volume indicator, the daily volume action is not all that positive.  For an on going rally one would have preferred considerable more upside volume than we have.

On the short term the rating is BULLISH with the very short term moving average line confirming.

It does look like silver is hitting a resistance and is starting to have problems moving.  On Friday the intra-day high was still lower than the previous day even thought it closed slightly on the up side.  It just may be starting a topping process but this would be a very short term one if it does actually top out.

PRECIOUS METAL STOCKS

The stocks had a good week with the higher quality stocks providing the better performance.  The Merv’s Qual-Gold and Qual-Silver Indices were among the best performers during the week while the Merv’s more speculative Indices were in the weakest performer category.  It looks like the higher quality investors are nibbling at the market but not too enthusiastically.  For the market to really be in a roaring bull phase we need to see the gambling variety of stocks moving.  That’s when speculators have decided that the up side is here to stay for some time.  From the long term perspective although the vast majority of Indices are either POS or + N in this week’s table the Penny Arcade is still in a NEG rating level suggesting that there is still more work ahead before that enthusiasm comes in.

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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