Technically Precious Metals with Merv

For week ending 29 April 2011

Gold and silver keep pushing into new high ground, why are the stocks not following? Too often the activity of the gold stocks is a leading indicator as to what the metal might be doing so one should be very cautious about jumping into the commodities at this time. This is not a certainty but the stock performances just may be warning of a metal collapse ahead.

GOLD

LONG TERM

The June gold contract hit $1569.80 on Friday, very close to my long time projection of $1575 ($1600 for simplicity). The next major stopping point on its way to the stratosphere will be the $2300 level. In the mean time things will not go directly there but in all likelihood there will be ups and downs along the way. In fact, a downer is getting closer and closer but even if it should come it is not expected to be a major long term bear but possibly an intermediate term one. Despite the cautionary tale above, a very encouraging sign that there is significant strength behind this latest move is the fact that the long term momentum indicator has now exceeded its peak from last October. This confirms the strength of the recent price move. Everything, price, volume and momentum are now in new bull market highs, if not all time highs. Technicians are always very happy in situations such as this but I always caution that new bear markets are usually generated from all time market tops. Be that as it may all long term indicators remain positive and above their respective moving average or trigger lines. The long term rating remains BULLISH at this time.

INTERMEDIATE TERM

Although the intermediate term is my favorite time period for speculation (and in gold it is not investing) usually it gets the short shift in my analysis between the long term and the short term. Here, things are also bubbling. About the only difference in the charts and indicators versus the long term is that the intermediate term momentum indicator has not quite matched its peak from last October, but this is a minor point as it is climbing rapidly and is in very strong territory. Here too, all the indicators are in positive territory and above their respective moving average or trigger lines, which themselves are in positive slopes. The intermediate term rating continues to be BULLISH.

SHORT TERM

Everything on the short term chart suggests a strong bull move but also is suggesting that the latest move may be a “blow-off” move. We have one of my expanding bearish FAN trend lines in force. These tend to be broken on the down side. As readers may remember, the breaking of that third FAN trend line is the end of the bull trend with a move expected to at least the first trend line. This break will come long before even my short term indicators go bearish but that is the power of the Expanding FAN trend lines and the “blow-off” stage.

Although the breaking of that third FAN trend line will most likely take place before the short term indicators collapse nothing is certain so let’s just look at what these short term indicators are telling us at this time. First, the gold price remains well above its positive sloping moving average line. The momentum indicator is very high up in its positive zone, in fact it is in its overbought zone from where reversals had occurred in the past. It is also above its positive sloping trigger line. As for the daily volume action, that is still relatively low. This has continually been one of the cautionary indicators that although the price action is very positive there seems to be a lack of speculative interest in jumping in on the up side of this trend. Still, putting these indicators together we still have a BULLISH rating for the short term. This is further confirmed by the very short term moving average line remaining above the short term line. As for the immediate direction of least resistance, global events seem to dominate and in volatile situations such as that it is dangerous to try and guess what to expect from day to day. However, I would venture a guess that we are getting closer and closer to some sort of a reaction. It may start tomorrow or may not start for another week; global events will most likely dictate the timing.

SILVER

Having just recovered from my power, phone and cable being ripped out of my house by a broken tree I am sort of behind time in this commentary so silver will get the short shift. However, a quick comment for now. Although with a better weekly performance than gold (see Table below), silver failed to make new highs on Thursday or Friday, unlike gold. It seems that silver is giving us an earlier warning of a possible reaction ahead. We will just have to wait and see.

PRECIOUS METAL STOCKS

For some time now I have been cautioning about a possible reversal in the gold and silver stocks. I had been waiting for the Penny Arcade Index to give me that advance warning as the gambling stocks (the pennies) are usually the first to collapse. Well, here we have it. The intermediate term turned negative back in early March and now we have the Index breaking below its long term moving average line for the first time since its bull move started back in late 2008. The long term moving average line has not yet turned downward but that may be only a week or so away. Another sign of a penny collapse is the intermediate term momentum indicator. It has now moved into its negative territory also for the first time since the start of the bull move. This is not the time to be holding the penny stocks and may be an advance warning that holding the speculative and investment quality stocks is also very hazardous. There WILL come a time to be jumping into the pennies. This Index should give us that notification with plenty of time to profit thereafter. For now, holding the pennies may be disastrous for your portfolio. Of course, this assessment may end up being wrong but if so one can always get back in with their capital, albeit at a slightly higher price. The option is to hold and pray. If wrong you will not have any capital left to get back in when the turn comes again.

Extracted from Merv Precious Metals Central