Bullish engulfment is confirmed and metals market is heating up:

 

METALS MARKET TURN AROUND IS IMMINENT

 

Metals Market Turn Around is Imminent


By Colin Emery      Printer Friendly Version
Jul 9 2007 3:45PM

www.goldoz.com.au

The following is an excerpt from the Weekly Gold Oz Newsletter.

It has been an interesting and tricky couple of weeks in the gold, silver and base metals markets – choppy, volatile and they have continued their short term corrective move downwards. The same comment applies for the equities markets with some solid noisy sell offs, accompanied by the usual market commentators tagging various old news, recycled yet again to attempt to “explain” the cause of each and every panic. 

Recently I have noted the following recycled news items - all offered to explain the current conditions… The US Economy is slowing, now it is because China is slowing, now it is because China is speeding up so inflation is a worry, inflation and interest rate hikes by the Fed, US Housing sector collapse, US Sub Prime Mortgage collapse… on and on they ramble.  I have heard all that a few times this year and most of it through 2006 as well - we will see it later in the ASX All Ords as well and mark my words they will repeat it all over again in this new fiscal year - 2007 / 2008.

Of note; data and earnings continue to confound them - because it is a silent proof of the underlying demand caused by the strong global economy. Then there is the other major factor - the plethora of investment funds seeking homes in which to park their funds - homes that can generate investment returns.

Of further note, for all metal and equities markets last week - the main news focus has been on the Sub Prime mortgage losses by hedge funds and Investment Banks. This reason was, in my opinion, just clutching at straws as a reason to explain the market sell off. The actual collapse of some mortgage companies was at the start of the year - then some earnings alerts - so this is just a flow on effect of the damage caused by less than prudent financial lending and trading of high risk assets by Investment banks you would have thought would have known better. In the greater scheme of things, $3B is next to nothing, a 20% fall in a high risk fund. Look at Enron if you want to see a real hit. 

Also look at the book value loss of a 0.25% move up in yields in the total market for a 10 Year Government Bonds - it dwarfs the Bear Sterns event. So don’t panic, use the corrections - as we have alerted GoldOz Newsletter subscribers, to buy or add to oversold precious metal and diversified ASX resource stocks. The same advice does not automatically apply for investments in the USA I am talking about Australia here.  Meanwhile of course the economic data coming out pretty much everywhere is pretty strong, the US Housing Sector is an exception not the rule. Earnings are going great and even Technology companies are back in the limelight with some good Earning results and forecasts.

As commodity prices rise productivity gains will come from technological efficiencies and input. This increase in wealth and assets, right down to the worker, means increased demand for technology (work & pleasure) and commodities.  Remember - this, as I have said, is a long super economic cycle - driven by global demand as second and third tier economies reach that critical mass to generate strong growth and demand. 

In the background to this - is coming another old character the Bears wheel out every now and then as the economic cycle continues to motor ahead through despite all the touted obstacles. It has been lurking and slowly bubbling to the surface and whilst everyone was waving their arms about and watching PM markets, equities, Fx and Bonds… oil bubbled to the surface once again.  It crept over US$70 at the close last week and stands ready to trigger some nerves - this old bogey will be out and about - for it is oils turn to be used, the new “blame” for an economic slow down… inflation will be the new focus and in the news - good for gold and silver. Oil was covered in the GoldOz Newsletter a few weeks back as a special inclusion – with a warning it was headed for a break out and going higher again.

As a “top down” analyst I always look to the major market forces such as oil, the Dow, Fx, Bonds and the major Australian Indices before I look to the direction and potential of ASX resource stocks covered in our Newsletter. The big picture view if you like to put it that way. This is an approach that worked for me in metals and Fx markets when I traded for major International Banks (Bank of America, Bank of Tokyo, Barclays etc, as a Senior Trader in Treasuries) over the years and it still works for me today.  One must consider the key drivers first and then look at the micro factors that drive each individual company. 

Precious Metal Commentary

Now let’s take a look at gold specifically.

Gold has been correcting since its failure to break $US692.50 a few times in April and May. We have seen a short term corrective downtrend, as shown by lines 2 and 3, in the above chart.  I have been saying that the crucial support for it has been $US645.00 and just below line 1 above this was the short term target - short term resistance.  Last week gold hit and again attempted to break crucial support with assistance of bad news as mentioned above. However it bounced back - as I have also said - a perfect short term correlation with the US equities market. 

The current short term corrective down trend channel is between lines 2 and 3 and the support line at $US647.50.  I now see this support line as crucial for gold to test the upper side of this channel line 3 which has now moved down from $US665 to $US658.  If gold does drift below $US647.50 it can continue to move down, especially if $US645 is broken - target then becomes support line 6 at $US628.

My favored outcome is that the blue arrow is indicating the formation of another small reversal pattern – just as we have seen a few other times in this channel - but it is now parallel to the previous double reversal of the left hand blue arrow along major support line 1. Also note that line 1 is based from some previous significant highs - it is a very strong line of support.

My conclusion is that gold is now completing this downward corrective move from that failed test of highs at $US692.50 and is now waking up. One thing that has started to make me feel increasingly confident is some negative sentiment and views out there on gold - that gold has now taken the sidelines to the news noise and focus on the market from the mainstream press. Gold has its friend oil ready to wake everybody up and I get the feeling gold will, for some reason, surprise us and wake up shortly. Note the RSI also looks to have formed a bottom and reversal pattern of its recent trend down from an overbought condition. Buy gold near supports for a test and break of line 3 - short term target line 4 at $US673.5. 

Resistance on the way at $US665.00 may prove to be a minor battle area and maybe for traders – a place to take profits on its first visit there. Over the coming week or two - gold will surprise us with a re awakening - it may be a new reason or an old one but the technicals are giving me that feeling.  When trading you should trust your feelings - your gut feelings as they say and it is coming to that time.

Plenty more for subscribers, the latest report was issued Monday 2nd July and covers precious & base metals, the S & P 300 Metals and Mining Index, the All Ords and nine resource stocks. My “off sider” Neil Charnock has just completed a precise accuracy test of my work on the April 2nd issue and this will be posted at the GoldOz web site shortly along with a broader analysis of the accuracy of the Newsletter issues.  The April 2 edition scored a highly credible 5/6 on the stocks covered (one nickel stock kept rising past my projection) including many near exact and exact support and resistance levels which held - and I also called accurate short term predictions for gold, silver, zinc and nickel.  Copper ran with my longer term prediction however it overshot my short term high as can easily happen when trying to pick tops or bottoms in volatile markets.

Should you wish to participate in the Australian Resource boom and make money here you should consider a visit to www.goldoz.com.au and to purchase a subscription to my Newsletter.

Many regards,

 

Colin Emery
Senior Client Advisor and contributor to the Weekly GoldOz Newsletter.