Dollar Rand Chart headed for trend change
Monday 14th of March 2005 08:38:43 PM
The dollar/rand chart appears to be close to a major trend change based on the monthly MACD oscillator. The monthly time frame of this indicator is usually a superb indication of major trend change. The South African Rand has been very strong in recent years and the SA miners have suffered because of it. Many of them tried to rally when gold was hitting new 52 week highs.
Major trend change coming?
They did ok, but not nearly as good as gold stocks based in the United States and other countries. The question now is whether or not we are on the verge of a major trend change in the currency and therefore also possibly in the SA gold mining stocks themselves. I believe this could be the case although there is still plenty more price work that needs to be done. The monthly MACD is usually a pretty good indicator of major shifts from bear to bull or bull to bear market. The dollar/rand chart you see to the left does show a possible near term crossover on the monthly MACD. The amazing thing is that the indicator itself has taken at least a whole year to base out before the crossover.
2 South African gold miners
Two South African gold stocks that come to mind are DRDGOLD and Gold Fields. DRDGOLD has been hit particularly hard by the strong currency and the stock chart clearly reflects this. It has been in a persistent downtrend for at least 1 full year and the downtrend has been on pretty hefty volume along the way as well. This one year long downtrend in DRDGOLD was actually a move that reflected the failure of a very large reverse head and shoulders pattern. Needless to say, the ‘news’ right now on DRDGOLD is pretty bad. They may have to shut down or consolidate many of their mines and they do not have the money to do it, or so it was said in some recent press releases.
From the ‘about’ page on the DRDGOLD site:
Durban Roodepoort Deep, Limited (DRD) is a dynamic, driven and independent gold mining company. Established in 1895, it is based in South Africa, with substantial operations and the extensive, brownfields Argonaut Project in that country. In Papua New Guinea, DRD owns and operates the Tolukuma mine, and has a 20% interest in the Porgera mine. In Fiji, it has a 19.8% stake in Emperor Mines Limited. DRD’s mission is to remain independent and to focus on extending ore reserve life safely and profitably.
Gold is DRD’s main product, derived both from deep-level and opencast gold mining, and from the retreatment of surface material. The current operations have been amalgamated and acquired since 1997. Production has risen from under 100 000 ounces a year to 1.1 million ounces during this time. The company’s attributed mineral resource base stands at 66.5 million ounces, and attributed mineral reserves are 17.0 million ounces.
Right now, based on the look of the chart, we can see that the price decline has almost fully retraced the entire up move from .70 to 5.8, so .60 to .70 is a level of support and the one that must hold to keep any sort of positive prospects alive in 2005.
The price decline in DRDGOLD looks about as persistent as many of the declines we saw in tech stocks during the 2000 to 2003 bear market. Many of those companies went bankrupt and their stock prices reflected this condition. Things just got worse and worse. Will DRDGOLD suffer the same fate? The company has been around for over a hundred years and they have the gold in the ground, not just a bunch of paper asset promises. Still the condition of the company at this moment in time based on everything I have read is not spectacular. But rather than guessing about fundamental aspects, the best assessment that I can make is based on the price chart.
DRDGOLD is approaching price support at about .60 cents. Price needs to hold there if it does get there. And then, price eventually must be able to break above the long green downtrend line before this one can even be considered as a turn around candidate. Based on time, the middle of this year should offer more clues as to what the verdict is. The bottom line is the price of DRDGOLD will have to make a decision between the long red horizontal line and the long green downtrend line. Stay tuned. I will revisit this one if I see something more interesting developing.
Lastly here is a chart of Gold Fields. The most notable thing about this chart is the long period of sideways cause building. There is a clear trading range between 9 and 15. With cooperation from the rand currency, GFI could eventually make an attack on 15. For now though, nothing to get too excited about except that the bigger picture has some potential, especially a break with confirmed volume above 15.
Hopefully by the end of this week I will be able to take a good look at the price of gold itself and its long term price chart. Then after that, the price of silver. Gold stocks are very leveraged to the price of gold. But as you can see from the chart of DrdGold in this article, not all gold stocks always perform spectacularly just because the price of gold is going through the roof. Each gold stock is a unique situation.
tc
In technical analysis, long term support or resistance lines always have more significance and strength than shorter term support lines. The chart of the commodity metal palladium shows that palladium has just recently done a double bottom or retest of a 23 year long support line. Keep in mind that the chart to the left is on a quarterly basis. Each price bar represents one quarter or 3 months. So the price chart still has some more work to do here. But it is clearly evident to me that as of this writing we have a double bottom and successful retest of a 23 year long support line. This is an important fact especially when you consider that many other commodities are blasting higher in almost parabolic price rises (for example crude oil, coffee, crb index, copper etc.). What I mean is that from a risk reward perspective palladium is starting to look good here. If the commodity palladium is able to hold itself here (probability says that it will based on the significance of the longer term support line), then that would mean what? Well to me it would mean an eventual attempt to retest 350, the previous swing achieved in 2004. This type of move in the commodity palladium would be very significant not only for the metal itself, but also for stocks who mine this particular commodity.
The chart to the left on the surface might be somewhat plain looking on the surface but it is actually screaming a major warning signal for the whole real estate market. Why? Because the chart is indicating that Fannie Mae stock has completed a major 7 year distribution topping head and shoulders pattern and also broken down through the neckline of this pattern. Basically what this means to me is that Fannie Mae stock is now in a long-term downtrend officially as opposed to simple sideways consolidation. Usually price declines occur more quickly than price advances because fear is a much stronger emotion than greed.
As you probably already know, most stocks on the exchanges follow a similar path as the S P 500 does. Not all of them, but the majority do. So clearly it is pretty important to know where the S P 500 is going on a short, medium and long-term basis. Otherwise you risk fighting the predominant trend, and that my friends is a very quick way to get in trouble. Since 2003 the S P 500 has powered higher with extraordinary strength and resilience. The move from that time has for the most part been with consistently good volume and price action. The almost one year long retracement which occurred during 2004 was I believe only a .382 fibonacci retracement from the lows of march 2003 to the high at the end of 2003. The fact that the retracement was so minor is indicative of significant internal strength in the this particular index.
Everything about the stock chart setup on March 3rd, 2005 was very good. The only bad thing was the fact that USTT is a very illiquid OTC BB stock that is never a good thing for anyone. However it was worth writing about to profile it as a great example of what I call a ’steam kettle pattern’. I call it a steam kettle pattern because there is a price pattern building under a long-term resistance area with building heavy volume. The volume in this case is the ’steam’ and the price pattern itself is the cause. A lot of the time the price chart pattern that builds under the long-term resistance is usually an ascending triangle. For the highest success rate, that would be the type of price pattern you would want to see. In my opinion this is always a great pattern to watch out for. The problem is that it is also very hard to find and will likely take you many hours of searching. All the right elements need to be in place for a stock or commodity to qualify as a ’steam kettle pattern’.
The chart you see to the left of this text is quite telling. For starters, note that the bottom half of the chart, the one of the crude oil future price shows us that the entire base building process from mid 2000 to late 2003, early 2004 had a strong ascending triangle chart pattern symmetry. The up thrust in very early 2003 tested the mid to late 2000 swing high on about 8% greater volume and hinted that the 38 level would eventually be broken. Well obviously it has done that already and done so with conviction. Then we see a clear test of the support level of 38 (although it did not quite reach it) and now a retest of the 55 level which I discussed in the posting previous to this one. If you glance back up to the top half the chart you can see that natural gas futures also have an ascending triangle pattern symmetry, but only if you discount the spike in 2000 and end of 2002 as up thrusts within the triangle pattern. If the price chart is compressed to quarterly price data then the whole pattern takes on the symmetrical triangle pattern. Also important to note is that the swing labeled ‘B’ on the natural gas price chart tested swing ‘A’ on 90% greater volume. A similar volume scenario exists on the stock NGAS. Anyway, the point of all this is that it says to me that the price of natural gas will also run up for a retest of the 9 level which would be somewhat similar to what crude oil is doing right now. For that scenario to remain in tact, the price of natural gas must hold support along that blue up trend line I have drawn in there.
Looking at the price chart of crude oil you can see a good looking and very symmetrical reverse head and shoulders technical analysis pattern. Crude Oil Futures successfully broke upwards through the neckline with a sign of strength and have as you already know trended towards the retest level of 55. The two blue horizontal lines define the trading range or major resistance and support levels, in this case 55 as resistance and 40 as support. In terms of the Wyckoff Method, 55 is the ‘creek’ and 40 is ‘ice’. It is not unusual at all after a breakout upwards through the neckline of a reverse head and shoulders pattern for the stock or future or whatever it may be, to return back to the neckline for a retest. In fact I expect this to be the case in the weeks ahead. This is a very very common occurrence and I would not be at all surprised to see it happen with crude oil futures. The alternative scenario is that crude oil holds here and hugs right under the longer term resistance level of 55. If this continues to be the case then it could imply a breakout of 55 sooner rather than later. For now though I will stick with the retesting of the neckline scenario. Another small hint is the price action of many oil and gas stocks this week. Plenty of pullbacks and consolidating from recent vertical moves.
Actually the overall chart pattern setup on USTT is extremely attractive. If this were a large or mid cap stock, I would probably rate it a 9 out of 10. The pattern setup looks good to me because what you have here is a 7 to 8 month FLAT base (bottoming process) which is indication to me of accumulation. The high volume spikes within the green shaded area are some evidence of that accumulation. But then also, you have this based and accumulation building up right under a 1 year long resistance area. This one year long resistance area is indicated with the horizontal blue line. These two facts are very important in this analysis. Why? Because in my experience in technical analysis and reading stock charts over the years, this pattern identification is one of the most attractive stock chart pattern setups you can ask for. The reasons for this are simple. Number one, you have a stock that has shown us that it has completed its base during which there was accumulation. Then you also have an indication of a sign of strength with volume that takes price to a new level and holds that level. And, as you will see in the chart in the next paragraph or two, we also have an ascending triangle formation building on a nearer term basis ( a highly reliable chart pattern) right under the long term resistance line (long horizontal blue line). All of these factors together create a high probability breakout situation.
The energy sector and crude oil is going beserk. There is just no other way to say it and it runs along the theme which I continue to talk about which is commodities and energy. As of this posting, we can see that crude oil is in the process of doing a retest of the mid 50 level first achieved in late 2004. Note also that the price of crude since early 2003 is rising upwards steadily on a trendline arc.
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