It's not as easy as buy or sell
Commentary: Charts suggest holding off on gold, oil
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 12:02 AM ET March 3, 2003
NEW YORK (CBS.MW) -- Timing may not be everything, but it's at least one-third.
I always found that it was easier to lose money than to make it. How could that be, if investing was a 50-50 proposition?
That's because it isn't. The market is three dimensional -- up, down and when. A lot of work is put in deciding if something will go up or down, but not enough thought is spent on the timing aspect of investing.
I've always felt the use of charts was the best way to assess the timing of investment decisions because of their flexibility and their objectivity.
And nowhere has timing become more important than for the gold and oil sectors.
The topic of nearly every conversation on Wall Street for the past few months has been Iraq and how it has affected the market. Gold has benefited from its status as a haven from uncertainty, and oil has gained on concerns over supply disruptions.
But as we sprint/crawl towards what may be final resolution in March, be it through war or more months of inspections, investing in gold and oil is no longer as easy as buy or sell.
In simple terms, it has become a little of both. Long-term bulls are still very much alive. But don't join them just yet, because they may need to suffer some short-term pain.
Gold bulls alive but disillusioned
Gold stocks have performed magnificently since the long-term bear market in gold prices ended in early 2001, as fears of an economic and stock market meltdown transitioned nicely to fears of terrorist attacks and war.
Although the long-term bullish scenario remains intact for gold prices, the precious metal has dulled somewhat as the post-Iraq countdown approaches zero.
"The long-term bull run is far from over," said Joseph Palmisano, technical strategist at IDEAglobal. "But for the short-term, there is significant risk of a correction."
Ironically, his short-term pessimism is derived from a long-term monthly chart, which is sporting a "bad looking" candlestick pattern in gold futures.
Candlestick charts, first developed centuries ago by Japanese rice traders, attempt to give life to trading data by creating a body -- the difference between the open and the close -- and upper and lower shadows - the difference between the high and the top of the body, and the low and the bottom of the body, respectively.
Palmisano feels February's long declining body and long upper shadow, which touched the highest level seen since 1996, following two strong months of gains, suggests bulls may need to take a breather.
Zooming in at the intraday action, the apparent exhaustion may be a result of disillusionment.
The night after closing at a multi-year high of $379 on Feb. 4, April gold futures shot up to a high of $390.70 in thin overnight trading ahead of Secretary of State Colin Powell's address to the U.N. Security Council regarding evidence of Iraq's non-compliance with resolutions (see Futures Movers).
But by the time the New York market opened (at $384.15), that high was already $6.55 away. Traders accustomed to seeing new highs before their very eyes were no doubt disappointed that they missed what may have been the biggest battle of the year.
Many decided to beat the rush and head for the exits before the final bell rang. The contract closed down $1.80 on Feb. 5, and declined in seven of the following eight sessions.
Palmisano said the futures contract needs to dip to $320 before long-term timers jump in.
Will oil take its cue from gold?
Meanwhile, oil futures still look good for both the short-term and long-term, Palmisano said, with the charts pointing to further gains to around $43.
He arrives at that target by way of a "measured move" technique on the long-term charts.
Take the range of the wave of buying off the December 1998 low of around $10.65 and the October 2000 high of $37 (a difference of $26.35), and added it to the bottom of the correction wave that ended at the November 2001 low of $17.12.
Measured moves are not a science, but they can help define a target for traders. It helps to set a potential for gains, to help judge reward versus risk profiles, and to keep from closing positions too early.
The short-term charts still look pretty clean so far, but experience suggests there is potential for them to turn negative pretty quickly.
After reaching a 12-year high of $38 on Feb. 26, April crude spike up to $39.99 in intraday trading the next day. It quickly backed off the high, actually closed down 50 cents at $37.20 (see Futures Movers).
Those that sneezed and missed the spike up to near $40 may be disillusioned enough to follow the advice of gold traders.
Gold stocks walk the line
The CBOE Gold Index ($GOX: news, chart, profile) had participated in the longer-term gold rally since early 2001, over the past 3 months, it appears to be playing a different game.
Senior technical strategist Patrick Fitzgerald at Thomson Financial pointed out that gold stocks don't necessarily have to decline along with the price of gold, given that producers conduct hedge operations to protect their downside. However, that would also mean upside potential may be limited.
Since the Dec. 12 close, the sector tracker has fallen 2 percent while gold futures have gained 5.3 percent. It also fell below in February the bottom of the band -- around 60 -- that had held the index in check over the last three months.
A further drop would put the "trendline," which has been tracking gains since July 2002, in jeopardy.
Draw a line connecting the July 26 low (43.25) and the Oct. 10 low (47.47). If you extend it to the present, you'll see that Nov. 27 low (50.56) also sits on the line.
(See interactive java chart and select "Draw trendlines.")
Two points make just a line, but three make a "trendline" (read more about "trendlines").
As of Feb. 28, that trendline came in at just above 55, versus the index's close of 59.77.
For the long term, however, MMS International's Katherine Beattie believes gold stocks, like gold futures, "still have more upside potential."
Maybe oil service, but not oil
While futures traders assess the odds of further oil price rises, Thomson's Fitzgerald feels the Phlx Oil Service Index ($OSX: news, chart, profile) still appears "to be a fairly good bet for bulls."
He noted that the sector tracker appears to be on the verge of breaking above a downtrend line that originated in Spring 2001.
The line touches the high of the May 13, 2001 week (136.26), the April 28, 2002 week (112.74), the May 12, 2002 week and the Feb. 23, 2003 week (92.83).
The index closed out the month of February at 88.19.
(See interactive java chart).
Fitzgerald said a solid break above that line would "extremely bullish" for oil service stocks, and target gains for the index to as high as 160.
But what will become of the index, if crude futures fail to keep rallying? Is the potential gain worth the downside risk?
Whatever the answer, stay away from integrated oil companies, as the Amex Oil Index ($XOI: news, chart, profile) "appears ready to collapse," Fitzgerald said.
Not only has the index failed to participate in the crude price rally, it is bumping along the lows seen in February 2000 (410). A break below that level would initially target the March 1999 low of 377 (see java chart). Bears would then target 300, Fitzgerald said.
That's pretty big downside risk, considering the index closed Friday at 425.86.
Timing play
Perhaps the way to play the current market is to wait until the immediate Iraq concerns are exhausted. That won't come until after the U.N. Security Council discusses the U.S. resolution, which is not scheduled until after chief weapons inspector Hans Blix's report on Mar. 7.
See Countdown to War.
Whether there is war or not, the markets will quickly rid itself of the Iraq effect, whatever that may be, and will be able to go back to moving on their own merits for a while. Only then will the near-term position squaring be concluded, and the underlying trend show itself.
In other words, if you're not in already, there is no reason to rush. If you're in and feeling a bit nervous, there is nothing wrong with taking some profits, but no need to completely close out positions.
For those who feel they have yet to bet on the Iraq play, MMS's Beattie believes gold stocks would outperform oil stocks at current prices. Given that long-term charts for both are still positive, the gold sector's recent underperformance indicates that there are less short-term bears left to hamper the bulls' progress.
Tomi Kilgore is a reporter for CBS.MarketWatch.com in New York. |
