Gold Potential Long-term Double Top Pattern
Commodities / Gold & Silver 2009 Jun 21, 2009 - 02:40 AM GMTBy: Merv_Burak
Gold dropped a little during the week but really went nowhere in the whole scheme of things. Lots of conversation about where gold is headed, in my local technical googlegroup. Here, you only get the simple, “where are we now?” and “what is the existing direction of trend?”. When things change my indicators will change and I will change with them.
GOLD LONG TERM
I try not to clutter my charts with too much information and to keep the information simple. Hey, I may not always succeed but most of the time I do. Here is a long term weekly chart of the gold price action for the past few years. I show this chart for two basic reasons. First to show the two potential double top patterns. The other is to comment on the moving average.
I use the term “potential” to indicate that the pattern is not yet complete and may not actually turn into a double top by subsequent action. In my view the term “double top: should only be applied to a pattern that has been confirmed so by the price breaking below its support level and the trend has been confirmed to the down side. Neither of these has yet occurred for either potential double top.
The long term potential double top is trapped between the tops of early 2008 and the recent tops, with the bottom being the one from the late 2008 action. The other potential double top is more of an intermediate term one and will be looked at in that section.
One major feature of a double top is the prediction of the extent of the new on going move. Very simply, technicians subtract the low point of the pattern (the low in between the tops) from the high point of the pattern and then subtract this result from the low point price. This second result is expected to imply how far the trend will drop. Well, for this long term pattern to be confirmed the price must first drop below the low point, which was the October low of $681. Subtract this from the March 2008 high of $1034 and we get a projected move, once the double top has been validated, to the $328 level. Now, if you think that gold could drop to the $681 level in the first place and then continue on to the projected value of $328 you should be running like hell away from this sector and going on into something more promising. As a somewhat gold bull I would not recommend you try and make a killing by shorting gold for the long term.
The potential pattern IS there but I don’t think we need to worry about it at this time. The potential will be negated once the price moves significantly above the tops into new bull market territory.
As for the moving average, there IS NO single long term moving average line. Some use the 200 day period for their average, some use the 150 day and others use the one year period. Some use a simple moving average line, some an exponential line and others a weighted moving average. So you see a long term moving average line could be a wide variety of lines with varying messages at times. I like to use a 200 day weighted moving average line, or if using a weekly chart that would be a 40 week weighted moving average. Just a personal choice but there is reason behind it that I wouldn’t go into today. You can use whichever time period or method of calculation you prefer, especially if it has shown to be a benefit to you.
The simple criteria for moving average use is that you are in a bull market as long as the price remains above the moving average line AND the line is sloping in an upward direction. You are in a bear market if the price is below the moving average line AND the line slope is in a downward direction. When the price is below the moving average line but the line is still sloping upwards or if the price is above the moving average line but the line is sloping downwards other criteria and indicators come into play to help determine the market position.
As we see, this week the price of gold remains above the long term moving average line and the line slope is to the up side, therefore one almost need not look at the other indicators to know we are still in a long term BULLISH trend.
INTERMEDIATE TERM
I did not mention the lead-up to the potential double top pattern above. I don’t like to apply the potential double top designation unless the lead-up activity to the first top has been an extended bull trend. For the long term pattern we had a bull market at least from 2002 leading up to the long term top of early 2008. For the intermediate term potential double top we do have an intermediate term bull trend from the October 2008 low leading up to the initial top of this past February. So, both potential double tops may be given the potential double top designation. Too often we have no real bull market leading up to patterns that have multiple tops. I do not consider those potential double tops (or head and shoulder) patterns.
The intermediate term potential double top (the blue lines) has a top at $1008 and a bottom at $865. Should the price drop below the bottom to confirm the double top pattern then the projection here would be to the $722 level, which is into the previous long term bottom area and could be considered as a major support. This scenario is likely so one should be on the watch for any further weakness in the gold price.
As for the moving average, see the short term chart. The price is toying with the moving average line at this point. The line itself is turning towards the horizontal in preparation for a possible turn downwards. For today the price of gold is just a tinge above the moving average line and the line is still sloping slightly to the up side. So, we are still in a BULLISH intermediate term mode. Looking at the momentum indicator (not shown) it is still in its positive zone confirming the bullish rating but is below its negative sloping trigger line, confirming the closeness of a potential reversal of intermediate term trend.
SHORT TERM
On the short term things are not all that great. The price of gold continues to trade below its negative sloping moving average line and the momentum indicator continues its trend inside its negative zone and below its negative trigger line. The daily volume action is low and slightly below its average of the past 15 days. This is to be expected during a price down trend. The short term can only be rated as BEARISH.
As for the immediate direction of least resistance, this is very dangerous to try and guess during a week-end as anything could happen on the world stage over a few days to move the price of gold, either way. However, looking at the indicators and price action, the past few days seem to have stabilized the price trend and the aggressive Stochastic Oscillator is setting up a positive trend although still in its negative zone. The lateral still seems to be the preferred direction but I would not be surprised if we might see some upside this coming week.
SILVER
As mentioned last week, silver has found support at the $14 level. Let’s now see what happens next. Over the past few weeks silver has been hit harder than gold but it had gone up faster than gold prior to that. The silver stocks are continuing to get hit hard. Of all of the Merv’s gold and silver Indices the Qual-Silver Index is the only one with a negative long term momentum indicator. The Spec-Silver Index, however, is still holding its own. The speculation has not gone out of this market (see also comment on the new Penny Arcade Index below).
The Table ratings are based upon weekly data and a proprietary program. The ratings sometimes differ slightly from what I get from using daily data and the normal indicators. Using the daily data the ratings for silver are the same as for gold, BULLISH on the long and intermediate term and BEARISH on the short term.
PRECIOUS METAL STOCKS
I just completed development of my Merv’s Penny Arcade Index of 30 penny gold and silver stocks and it blew my mind. The chart is presented here for your information. I will post the chart and the Table of technical information and ratings on my Uranium Blog (http://techuranium.blogspot.com) probably by Sunday afternoon but at the latest on Monday. This Table will become a regular weekly feature for my subscribers to the Precious Metals Central service (www.preciousmetalscentral.com). The criteria for stock inclusion into this Index was pretty simple. To be initially included the stock price must be less than or equal to $0.25. The stock price must have at least one year of relatively active trading history. That’s it. They all met these criteria last week as the Index was firmed up. I then back developed the Index to provide at least 2 years of history for a decent Index chart. This back development of the Index may be criticized but nothing is perfect.
This chart highlights many points I have often made about gold and silver stocks, actually speculative stocks in general.
The more speculative the stock the earlier it is likely to top out. This is born out as the top for my less speculative universe of 160 topped out on 02 Nov 2007 while the Qual-Gold Index and the PHLX Gold & Silver Sector Index topped out on 14 March 2008.
The higher quality stocks are the first to start new bull moves after a bear market. Using a move through the intermediate term moving average line as the criteria, the Qual-Gold Index started its move on 28 Nov 2008 while the PHLX and the 160 Index started their moves on 12 Dec 2008. As we can see, the Penny Arcade started three weeks later on 02 Jan 2009.
During a bear market all of the Indices drop about the same amount, percentage wise. This is true when comparing the PHLX, Qual-Gold, 160 Index and my Spec-Gold Index. The Penny Arcade, which is far more speculative than any of the other Indices, dropped 17% to 20% further than the other Indices during this recent bear.
The more speculative the stocks the greater their performance will be once they start moving in a bull market. From their bottom late last year to the Friday close their performances have been as follows: PHLX up 100%, Qual-Gold up 113%, 160 Index up 148% and the Penny Arcade up 497%.
I just though you might want to digest this information and use it towards your future speculations or gambling activities.
The Penny Arcade has been added to my Table of Precious Metals Indices.
McEwen Junior Gold Index
Much has been written lately about the new McEwen Junior Gold Index developed by McEwen Capital (Rob McEwen’s company). For a comparative study I took the liberty of developing one of my Tables using the component stocks of this Index. The results were very, very favorable to the McEwen Index. Although the Index fell just as much as the quality Indices fell the upside since the bottom of the bear has been much, much better than the other Indices (except for the Penny Arcade). On the up side the McEwen Junior Gold Index has gained 235%, more than double what the PHLX Index has done. For those interested you can go to the web site www.mcewencapital.com for more info and daily Index update.
Merv’s Precious Metals Indices Table
Well, I think I’ll call it another week.
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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