Technically Precious With Merv

It’s been a couple on months since my last missive.  I’ve been waiting for some propitious moment where I can jump up and down and proclaim “the moment has come, the time is ripe, we’re on our way towards $2400” but that was not to be.  Gold just kept on sinking.  Well, you can’t have everything.

There are some bright spots in the technical action that just might develop into that propitious moment but at this point they are only in the early development stage and must be watched to see how it comes out.  In the mean time here is my take on where gold and gold stocks are as of the Friday close.

GOLD - LONG TERM

I had a look at two different long term point and figure charts.  Both gave me a projection down to the $900-$925 level, which is still some distance from where we are.  These projections are not cast in stone but used mainly to determine if the trend (at the time of the initial break) could be short or long.  If the projection is for only a few dozen points then one might ignore it.  If the projection is for a thousand points then one would pay great heed and act accordingly.  The first projection came in Sept of 2011 while a second one was calculated in Dec of 2011.  Since gold at that time was trading slightly above the $1500 level one would not want to risk the up side until a confirmed reversal took place.  I am still waiting for such reversal.

Trend: From the long term trend standpoint there is nothing much good to say about gold at this time.  It remains below its long term moving average line and the line continues to slope downwards.  We had gold in a long term downward trending channel.  Although I haven’t drawn the channel in the chart one could visualize a trend line from the top in Oct 2012 down through the tops in Nov 2012 and Jan 2012.  Its parallel bottom trend line to make the channel could be drawn from the bottom in Nov 2012.  This lower channel line, acting as a support, was breached on the down side in April of this year.  This channel support line now becomes a resistance line against any attempts to rally and reverse.  It must be breached on the up side now.

Strength (or momentum): The long term strength indicator (the RSI) continues to be negative although for the past month it has been improving and has moved above its trigger line.  The trigger line is moving higher with the indicator.  There is NO positive divergence shown in this long term indicator.

Volume:  The long term volume indicator is showing some signs of perking up but not enough to get excited about.

All in all the long term rating remains BEARISH.

INTERMEDIATE TERM

   

The intermediate term prognosis is a little bit more encouraging than the long term.

Trend:  Gold is attempting to move above its intermediate term moving average line and although it has been above the line for a few days it closed on Friday right on top of the line.  Throughout the move above the moving average line the moving average remained in a negative slope so more work is required to turn it to the up side.  Another thing I look for to determine a reversal is to see if the short term moving average line has crossed above the intermediate term line.  Although in a definite short term rally mode the short term line remains below the intermediate term line at the Friday close.

Strength (or momentum):  The intermediate term momentum indicator remains in its negative zone but is strengthening and moving higher.  It has moved above its trigger line and the trigger is now in a positive direction.  One will see a slight positive divergence in this indicator versus the actions of gold at the recent June bottom.  This is very often a very positive sign and often causes one to go with a reversal.  However, taking a good look at the indicator, all it was telling us at the recent bottom was that the strength of the decline was very, very similar to the strength at the previous bottom.  What one looks for is a serious divergence to suggest a significant reduction in the negative strength.  This was not the case so one should look at this positive divergence with a great deal of caution.

Gold needs a little more upside action before I can go bullish on it.  At this point the best I can rate gold is to give it a + NEUTRAL rating, one step short of a full bull.

SHORT TERM

The short term is where one will most likely see the start of any reversal action.  Unfortunately, one cannot count on the short term as it may go bullish a few times before the final reversal of trend.  Short term action is just that, short term.

Trend:  We have gold in a nice little short term up trend, above an up trend line (not shown) and above its positive sloping short term moving average line.

Strength (or momentum):  Unlike the other time periods the short term momentum indicator is quite volatile and goes up and down regularly.  At the Friday close the indicator is inside its positive zone and above its positive sloping trigger line.  Although it has reacted slightly at week end during the week it hit its highest level since the bear started last October.

Volume:  Although the daily volume action is not bad it is not at a level one would want to see during the start of a bull market.  Volume has been rising slightly the past few days but is still BELOW its average short term volume line.

With the indicators on Friday one can only assign a BULLISH short term rating to gold.  However, the short term is not all that strong at this point so do not be surprised if a move back to the down side may return.

MERV’S GOLD & SILVER 100 INDEX

 

Gold bullion is one thing, gold stocks are another.  Most of the time they are in sync but often they are not so one should never assume just because gold is moving in one direction that the stocks should be doing likewise.  One of my two proxies for gold stocks is my Gold & Silver 100 Index.  This represents the average performance of the top 100 gold and silver stocks traded on the North American markets, based upon market value at the time of the last revision.  So, what is this Index telling us about the situation with gold stocks?

LONG TERM

Previously I had shown this head and shoulder pattern the breaking of which projected a move back to its late 2008 levels (actually a normal H&S count would take us to the 141 level).  That suggests that there is still more downside action to come.  However, there are two ways of calculating a move on an H&S break.  There is the normal way using the equal price move method which is used by almost every one 99% of the time.  There is another calculation that can be made and that is the equal percentage move method.  If we take the percentage drop in the Index from its top to the neckline and apply it to the neckline for another equal percentage drop we get a projection to the 219.5 level on the Index.  This is only 2 points below where the Index finished a few weeks ago.  IS THIS THEN THE BOTTOM?  Only time will tell.  Anyway, if it is the bottom I’m not above claiming “I told you so” even if in reality I didn’t.

Trend:  The Index closed on Friday still well below its long term negatively sloping moving average line.

Strength (or momentum):  The long term strength (or momentum) indicator (the RSI) remains in its negative zone but showing some signs of strengthening.  It has refused to go lower during the recent Index moves into lower territory and has gone above the highs of the past few months. 

The momentum indicator may be our first signs that we may be into a long term trend reversal for the stocks.  This needs to be confirmed.  For now the indicators place the long term still in the BEARISH side.  Going to a table of these 100 stocks the final percentage bull and bear ratings, taking the + and – neutral into account, was 10% BULL and 75% BEAR rating.  Most stocks are still in bearish territory, long term wise.

INTERMEDIATE TERM

Now we get to the good stuff (or at least the better stuff).

Trend:  The Index has been moving higher and closed above its intermediate term positive sloping moving average line.  If we draw a trend line from the March high through the May/June rally top we see that the Index had broken above this trend line a week ago. 

Strength (or momentum):  From the Index low in April to the May low and the early July low the intermediate term momentum indicator has been making a higher and higher low at each point.  Although still in its negative zone the indicator is comfortably above its positive trigger line.

Although there are still some resistance levels to overcome from the April-June activity one must rate the intermediate term as BULLISH at this point, until confirmed otherwise.

Looking at the table for the 100 stocks and taking the + and – neutral stocks into consideration we get a percentage BULL/BEAR rating of 77% BULL and 17% BEAR.  Most gold and silver stocks are in definite bullish trends.

SHORT TERM

Using weekly closing data for my Merv’s charts it is very difficult to get a good reading from the short term perspective.  I will only summarize here.

The short term looks even better than the intermediate term.  The Index closed above its positive sloping moving average line.   The short term momentum indicator is nicely in its positive zone above its positive trigger line.  And all is well with the world.

The rating can only be BULLISH.

Again, looking at the table of the 100 stocks gave us an overall BULL/BEAR percentage as 91% BULL and 7% BEAR. 

MERV’S PENNY ARCADE 50 INDEX

 

A 2150% bull move from the 2008 bottom to a 64% bear move to the recent lows, when the pennies move they really move.  That is why penny stocks are trading vehicles and not investment vehicles.  The only problem is to determine when the next bull move will start and at this writing that move has not yet started.  The usual pattern is for the pennies to lead the overall gold market at the top BUT lag the overall gold market at the bottom.  It’s still a wait and see situation.

The chart has previously been shown and the Merv’s FAN PRINCIPLE briefly discussed.  A breaking of that third FAN trend line is required to confirm a new bull market but that is far away and one would, at this time, use other indicators to assess a possible reversal.  For now I would expect the Index action to continue to be trapped between those second and third FAN trend lines.

This commentary has already gone on for too long so I will not drag out any detail analysis of the Penny Arcade 50 Index only to say that from both the long and intermediate term perspective the ratings are BEARISH.  The Bull/Bear percentages for the Penny Arcade 50 stocks, for the long, intermediate and short term are respectively 12% BULL and 76% BEAR, 41% BULL and 42% BEAR and 52% BULL and 40% BEAR.

 

I welcome comments and/or suggestions.  My email address is [email protected].  I read them all although unfortunately I may not be able to answer them all, but I’ll try.