Weekly Gold and Silver Technical Analysis Report - Possibility of Breakout Failure
Commodities / Forecasts & Technical Analysis Feb 05, 2007 - 12:30 AMBy: Merv_Burak
GOLDIt was looking good there for a while but then along came Friday. Why always Friday? Maybe it just seems like sharp moves occur on Friday's. Maybe speculators do not wish to hold contracts over the week-end.
LONG TERM Well, the first thing is the long term P&F chart (see chart in last week's commentary). Thursday's action broke that initial resistance at $645 with a move to $660 to provide a bullish signal. The swift reversal on Friday, however, puts that break-out in doubt. As mentioned last week I think it's best to wait for a move to $690 which would break through the next serious barrier. That would then set up a stronger move that would take us through to new bull market highs and then through the 1980 rally high of $748. After that, the 1980 all time high of $894. But let's take it one step at a time.
Market action like that on Friday does not usually affect the long term position of gold (or stocks). It did, however, seem to somewhat nullify an upside P&F break that occurred just the day before. The indicators are still all in the positive although not encouragingly so. Although the price action is still taking place above a positive long term moving average line, the positive feature is not all that positive. The moving average line has been bobbing upwards and downwards without taking hold of any direction for long. This is one worrying thing about these past several months. One does not REALLY know which way the trend will really take off in but it will do so at some point. In the mean time the long term prognosis is still more neutral than anything else.
TREND and OTHER LINESOn the chart below are drawn several trend lines. One can say they represent long term trends or intermediate term trends but all technicians would agree that they represent some kind of trends. Let's go through and see what they do represent.
Looking first at the price data we have a long term up trend starting from the low in July of 2005. This line has proved to be a very strong support up trend line. It has been touched, or almost touched 4 times since the start with a rally following each occurrence. Should this line be decisively breached on the down side we would really have a problem.
The next line to consider is the Head and Shoulder (H&S) neckline which was touched in March, June and October of last year. Whether or not we still have a valid H&S pattern (due to the extended right shoulder) we do have a support trend line. If the long term trend line should be breached the last line of defense prior to a significant decline would be this trend line.
Also drawn on the price data is the red resistance line. Following a sharp decline after a significant advance what you usually get is a bottom followed by a strong rally. This often provides a bottom and top for a lateral activity that often follows. This is what we have here with the bottom in June and a sharp rally high in July. For the past 7 or 8 months these levels have not been breached. A breach, either on the up side or the down side may be taken as significant events that may forecast the direction of the price for some time.
Lastly on the price data are drawn the three bearish accelerating FAN trend lines ending with the third “blow-off” stage line that started in March of 2005.
On the intermediate term price momentum indicator (50 Day RSI) are also drawn trend lines. What's interesting about these lines is that they seem to provide information as to price bottoms and tops during a lateral trend. Every time the indicator came down to the 45% level it seemed to rally. Every time it got to the 57%/58% level it seemed to react. Once it broke through the 58% level it was on its way to a several month great bull move.
These trend lines are not perfect but one might want to watch them and understand that once these are breached the odds of a change in price action (versus the established action) must be considered as high.
INTERMEDIATE TERM It's hard to maintain a neutral intermediate term position when the trend seems to be so positive, except for Friday. With the majority of the week's price action occurring above a positive moving average line, with momentum moving into new multi-month highs and volume indicator seemingly moving higher and higher, everything looks just too good to be true. And maybe that's what it is, too good to be true. But technicians are not supposed to be going by looks, only by the charts. Everything there is great so despite Friday's action I am turning bullish. With the intermediate term P&F chart moving into new highs what else can one do?
Having gone back to the bullish side there must be something in the chart action that I can grab on to for a dissenting view so that I can claim ”I told you so” no matter what happens ahead. For that I have to go back to last week's commentary. The price action for the past several months has been in a basic lateral trend and this week's action remains so. We are near the upper part of the trend so there may be little upside before a reversal of trend takes hold. See the chart on below.
If the indicator is to perform as it has over the past couple of years we should be in for a reaction from here. If the indicator should continue higher and breach that 58% level, we may be in for another move such as we had from July/04 to May/05.
SHORT TERM
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It appears that the short term trend that started at the beginning of the year has ended. The only hold out is the fact that the price is still above its positive short term moving average line. However, that may not last another day. The price closed below its up trend line while momentum (13 Day RSI) entered and then exited its overbought zone for a reversal signal. It also broke through its up trend line from the first week of the year. We seem to be all set to move back to the Jan bottom but let the action dictate.
IMMEDIATE TERM On the more immediate term basis the Friday close was below its very short term moving average line and the line itself has turned sharply towards the down side. It is not quite there yet but another day would do it. The aggressive Stochastic Oscillator (SO) tried to rally this past week back into its overbought zone but the SO action was almost pathetic. Just no strength to go along with the price action. So we had Friday. Here too all indications are for a continuation on the down side on Monday and Tuesday, baring unexpected world political events.
NORTH AMERICAN GOLD INDICES I'll forgo a commentary on the major North American Indices in an effort to catch up on time. There was nothing interesting happening anyway. The Indices remain in a basic lateral trend with no end in sight.
MERV'S PRECIOUS METALS INDICES Most of the Indices had a positive week although nothing to write home about. Less than 1% was the order of the day. The Composite Index of Precious Metals Indices continues to act positively but still not going anywhere.
As with other areas of the commentary, I am cutting the commentaries in this section short to preserve time (see comment at the beginning of the commentary).
MERV'S GOLD & SILVER 160 INDEX It was a relative quiet week with the average increase of the 160 stocks set at only 0.7%. That puts the Index at new rally highs but still lower than its peak in May of 2005. Despite the new high in the Index, the momentum indicator is still under performing suggesting that the strength of the recent Index move may not have longevity. Otherwise, everything still looks rosy from the long and intermediate term.
MERV'S QUAL-GOLD INDEX MERV'S SPEC-GOLD INDEX MERV'S GAMB-GOLD INDEX The three gold and silver sector Indices (see next section for silver by itself) continue to move higher. Although the gambling sector did not move during the week it had already moved well into all time new highs last week to suggest that there may be a lot of speculative activity in the gambling sector as opposed to the quality sector. It's always instructive to know which sector is the best bet for the best use of capital. Of the three sector Indices only the Gamb-Gold has moved into all time new highs. The other two are still below their recent rally highs.
SILVER The silver rally seems to be petering out. We have several indications that silver has reached a temporary top and the action over the next few weeks may be more lateral or downwards than upwards. We'll just have to wait and see how this plays itself out.
MERV'S QUAL-SILVER INDEX MERV'S SPEC-SILVER INDEX Of the two the Qual-Silver had the best weekly performance with a gain of 1.7%. With only 10 component stocks in the Index the performance on only one stock could have a huge effect on the Index itself. This is what happened with the performance of Silvercorp Metals itself adding a full percentage point onto the Index performance. The Qual-Silver Index is my other Index that is well into new all time high territory. The Spec-Silver Index is above its recent rally highs but still below its all time high.
LIVING IN THE FROZEN NORTH
After spending some 13 years living and working in Southern California I returned to Canada . The first thing I encountered was a power failure in my area. Throughout my stay in California I cannot recall even one power failure. Here in the frozen northland power failures are not a rarity, we get one every month or two. Some are short (a couple of hours) and some are longer (a few weeks). You get used to it. We had a seven hour one today which has set back my schedule so the commentary was a little shorter than usual this week.
I'm calling it a day. I apologize for the brief commentary and hope to be back to normal next week.
MERV'S PRECIOUS METALS INDICES TABLE
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By Merv Burak, CMT
Hudson Aero/Systems Inc.Technical Information Group for Merv's Precious Metals Central
e-mail: merv@themarkettraders.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 www.themarkettraders.com and click on Merv's Precious Metals Central . There you will find samples of the Indices and their component stocks plus other publications of interest to gold investors. While at the themarkettraders.com web site please take the time to check out the new Energy Central site for the most comprehensive survey of energy stocks on the internet. Before you invest, Always check your market timing with a Qualified Professional Market Technician
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