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Weekly Gold and Silver Technical Analysis Report - 18th March 2007 - Technically Precious with Merv

Commodities / Gold & Silver Mar 17, 2007 - 09:31 PM GMT

By: Merv_Burak

Commodities

Gold went down. Gold went up. In the end gold went nowhere during the week. If this keeps up one can just go to sleep for a while and miss nothing. But are there stirrings under the guise of boredom? Let's see.

MOVING AVERAGE : Last week I briefly commented upon momentum, what it was and how to use it. I guess I should also say a few words about the moving average, which is another of the important indicators I use in my simple market analysis. I say “simple” as I do not believe in the complicated or super sophisticated. If it's not simple

I have found too often that it is also not worth the extra time and effort versus the potential extra benefits. I like the simple message of an indicator and especially the message that tells me “ you screwed up, get out fast ”. The moving average is one such simple indicator that does the job. Unfortunately, it is also an indicator that at times causes sudden reversals of message (whipsaws) so nothing is ever perfect.


A moving average is nothing other than an average price over a specified time period. Drawing a line from one day's average price to the next day's value and we get the “moving” part of the indicator. There are different methods used to calculate this average price. The most popular is the SIMPLE moving average. Here, you just add the last X days of values and divide by X to get your average. The other popular moving average method, especially now that we have computers to do the hard work, is a weighted method whereby more weight is given to recent prices and lesser weight is given to the older prices.

Here, there are two popular methods, the EXPONENTIAL and the WEIGHTED. The exponential moving average is the one most often found used within technical software programs as it is a simple average and less time consuming than the weighted average. I prefer the WEIGHTED moving average because of how I use the information. You will note that I identify this moving average method by the use of the lower case “w” in the abbreviation, i.e. 50 DMAw (the D indicating a Daily moving average).

As in the case of the momentum indicators mentioned last week, by varying the time period used to calculate a moving average one can get information relative to any investment time period. With the weighted moving average method, I use 15 days for short term information, 65 days (or 13 weeks) for the intermediate term information and 200 days (or 40 weeks) for long term information. For those who may prefer the simple moving average method these time periods would be 10 days, 50 days and 200 days respectively.

A mistake too often made when using a moving average as the determinant of trend is to jump to conclusions just by a simple crossing of the moving average line by the price. Unfortunately, the crossing of the moving average line by the price is not an uncommon event. By itself it does not necessarily imply a change of trend. It is often just the consequence of a volatile price move or one that over extended itself. To keep from getting whipsawed too often in this way I wait for the moving average line to

ALSO change direction before confirming that this indicator has signaled a change of trend. Depending upon the message from other indicators, such as the momentum indicator, one might take the simple crossing as the signal and not wait for the moving average to change slope. Some analysts require a crossing by a certain percentage before confirming a change of trend. Many different criteria can be developed when using the moving average. Whatever works.

Before acting on the information of the moving average one might want to take a look at the information from a time period one notch lower. If one has a break below an intermediate term moving average line and the line may be turning down it might be beneficial to look at the short term information for confirmation. It just could be an over reaction on the part of the intermediate term and the short term may already be firming up or moving in the other direction, to be followed shortly there after by the intermediate term. As mentioned above, there are many different criteria on can develop when using the moving average.

GOLD : LONG TERM

Well let's get to the charts. Last week's chart has changed very little so I will forgo it this week. The long term P&F chart was last shown in the 23 Feb 2006 commentary. Since then the only change has been a reversal of chart direction to the down side with O s but the trend is still within the BULL definition. With the existing chart gold would have to drop to the $555 level before a reversal of trend would be signaled. Of course should we have more chart action with change of direction then the trend change location might change and move higher, but that is for another day.

Although the week's action has been basically neutral it was still all taking place above the positive sloping long term moving average line. The long term momentum remains above its neutral line for a positive but neutral reading as the momentum line itself is tracing a lateral path.

All in all, although the indicators are all in their positive zones the weakness in the recent action causes me to remain in the NEUTRAL camp for another week.

INTERMEDIATE TERM

The intermediate term P&F chart shown in the 02 March 2006 commentary has been breached on the down side providing us with the dual signal required to change the trend identification. According to the intermediate term P&F we are now in a BEAR trend with a projection to the $570 level. That is near the bottom of the channel line in early October shown on the chart above. However, the chart above is still not all that sure it is in a bear trend.

Looking at this chart we are still inside the up trending channel for both the price and the momentum indicator. True, in both cases we are near the bottom of the channel but still inside. The Friday close was right at the intermediate term moving average line with the line slopping very gently upwards. The momentum indicator is likewise just a shade above its neutral line. Not shown on the chart but the volume indicator is the sad sack of the indicators.

While the price and momentum are bouncing off a higher low versus its low a week earlier the volume indicator is moving into lower lows and not causing much of a bounce. With the price moving above and below its moving average line and the line slope changing direction almost weekly and with the momentum indicator barely above its neutral line there is no real reason to turn my previous intermediate term rating to the positive, I will upgrade the rating from the bearish last week to a – NEUTRAL rating, which is just a notch above a full bear rating.

SHORT TERM

With the wishy-washy action we have had over the past couple of weeks one is loath to guess what to expect over the short term. I guess I'll just have to go with the chart and see what it provides. First and foremost, the short term action is trapped inside a lateral box with the upper resistance at the $660 level and the lower support at the $635 level, give or take a few pennies.

From this one has some guide lines as to when we could have an up move or a down move confirmed. Another potential indicator on the chart is the decelerating bullish FAN trend lines. The first two lines can be drawn while the third confirmation of new trend line is placed about equal distance from the second as the second was from the first. We might cross this third FAN trend line at the same time as the resistance is crossed, if the action continues higher.

The Friday action took the price above its short term moving average line and although the line is turning to the up side it is not quite there yet. The short term momentum indicator is following the price action and is not quite into the positive zone. One more up day might do it. For now I will go with a lateral trend that keeps the action boxed in as shown. However, should the price close above the resistance or below the support, a new trend is then defined.

IMMEDIATE TERM

Well, here comes that coin. Heads the market moves higher at the beginning of the week and tails it moves lower. Only the most scientific analysis done here.

Heads we have it. Along with the coin we do have gold above a positive sloping very short term moving average line and the Stochastic Oscillator moving higher (although not quite positive). With 50/50 odds of being correct one can't ask for anything better these days of world turmoil.

NORTH AMERICAM GOLD INDICES

Is it the turn of the PHLX Gold & Silver Index to be reviewed? It seems like only a few weeks ago we last looked at it. OH YES, it was only a few weeks ago.

Will this ever present potential head and shoulder pattern ever end? It just seems like it is going on forever. However, despite the longevity on the right side this can still be claimed to be a head and shoulder pattern, except with a weird right shoulder. The other feature of this chart is that over a year old gently downward sloping channel. Except for the May high which went outside of the channel (but was shown to have greatly diminished strength by the momentum indicator) all the action has been held inside this channel.

That makes this channel quite significant. Any move outside of this channel could be considered as a new major trend. Momentum has basically been hugging that neutral line for many months now. It needs to perk up for any new major move to have longevity. It has not perked up yet so we have no major move yet. This past year has been a traders market and not an investors market, at least as far as this Index is concerned. Of course my Merv's Gold Indices have been saying something different. Here, we are in a waiting game.

MERV'S PRECIOUS METALS INDICES

It was a so-so week for the various Precious Metals Indices, some closed higher and some closed lower but neither by very much. The Merv's Indices were likewise a mixed bag. Four Indices closed lower while three closed higher. The more speculative Indices did the worst with the Gamb-Gold closing 2.1% lower while the Spec-Silver closed 3.5% lower. It just looks like the Indices took a week off to rest before going on their merry way again, whatever direction that will be.

MERV'S GOLD & SILVER 160 INDEX

The 1.1% loss in this Index during the week could be attributed to the poor performance of the gambling variety of stocks. Those were the losing category on the week and pulled down the whole Index. The higher quality stocks actually closed on the up side but there are a lot less of them versus the gambling variety.

Looking at the charts of the universe of 160 I see that not much has changed from last week. The Friday close was above both the intermediate and long term moving average lines. Both lines are also still heading upwards. As for momentum, both are still positive but continuing to show weakness rather than strength. The table has the ratings as POS for the long term and + N(eutral) for the intermediate term. I see no reason to differ.

There were a total of 67 stocks advancing on the week (42%) and 86 stocks declining (54%) which resulted in the minor loss in the Index. As far as the summation of individual stock ratings is concerned they all moved just a slight bit towards the negative but without changing anything. The short term rating went from a BEAR 61% to a BEAR 66%. On the intermediate term that drift went from a NEUTRAL rating to a BEAR 52% rating. On the long term the BULLISH rating went from 55% to 54%.

Although there were a lot of double digit weekly moves in the universe there were no stocks that made it to the plus/minus 30% category so it looks that overt speculation, either on the up side or down side, has not yet entered the market and is yet to come sometimes ahead. Let's hope it will be on the up side.

MERV'S QUAL-GOLD INDEX : MERV'S SPEC-GOLD INDEX : MERV'S GAMB-GOLD INDEX

Where the action was or wasn't is reflected in the advancing versus declining issues from these three sector Indices. The highest quality Index, the Qual-Gold Index, had 67% advancing issues and 33% declining issues. The lowest quality Index, the Gamb-Gold Index, was almost the opposite with 70% declining and 23% advancing issues. As for the middle of the road Index, the Spec-Gold Index, it just about broke even with 47% advancing and 50% declining. As for the summation of individual ratings, they improved by a percentage or two for the Qual-Gold Index and declined by a percentage or two for the Spec and Gamb-Gold Indices.

Looking at the various charts of these Indices a different picture emerges as to what is moving and what not. The Qual-Gold Index is above a positive long term moving average line but below a negative intermediate term line. Both momentum indicators are in their positive zones but not too positive and showing some weakness. As for the Gamb-Gold Index, it is above both positive sloping moving average lines for a still strong position.

Both momentum indicators are very positive with the intermediate term indicator just dropping below its overbought line for a sign of a possible rest period to come. The Spec-Gold is again, in between the two. The Index is sitting on top of its intermediate term moving average line but above its long term line. Both lines are still positive in slope. Both momentum indicators are positive but weak. I have no argument with the ratings for these Indices shown in the tables.

SILVER

Although the daily trading action does not give rise to too much encouragement the chart on the next page is very encouraging. What it shows is an up trending channel that has captured the silver trading action since the initial bottom after the May top. Since that low in June we have had trading lows every three months with the latest on-going right now. After each low was a good rally to new recovery highs. Will we repeat the pattern again? We are ripe for another good rally right about now. The intermediate term momentum indicator also shows this same action.

MERV'S QUAL-SILVER INDEX

The Qual-Silver Index gave us the best weekly performance of the Merv's Indices this past week but that was still only a 0.6% gain. As with the Qual-Gold Index, this quality silver Index had a good ratio of advancing versus declining issues with 70% advancing and 30% declining. Despite the performance the summation of individual ratings were a mixed bag. The short term improved from a BEAR 80% to a BEAR 70%. The intermediate term declined from a BEAR 50% to a BEAR 60%. As for the long term ratings, they did not move remaining at a BULL 60%.

Friday's close was above a long term positive moving average line but still below a negative intermediate term line. Both momentum indicators are in their positive zones but the intermediate term indicator is very close to the neutral line. The table ratings are NEG for the intermediate term and POS for the long term. They look okay to me.

MERV'S SPEC-SILVER INDEX

As with gold, this speculative silver Index has almost the opposite values for advancing versus declining issues versus the Qual-Silver. Here we had only 24% advancing and 68% declining issues. All the ratings declined on the week. The short term declined from a BEAR 62% to a BEAR 74%. The intermediate term declined from a NEUTRAL to a BEAR 52% while the long term declined from a BULL 56% to a BULL 52%.

 

From the chart we see that the Index closed below a negative intermediate term moving average line but above a long term positive line. Both momentum indicators are still in the positive zone but the intermediate term indicator is very slightly above and heading lower fast. Again, I have no difference versus the ratings provided in the table, i.e. NEG for the intermediate term and POS for the long term.

MERV'S PRECIOUS METALS INDICES TABLE

That's it for this week.

By Merv Burak, CMTHudson Aero/Systems Inc. Technical Information Group for Merv's Precious Metals Central Web: www.themarkettraders.com 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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