INITIAL PRECIOUS METAL BUY SIGNALS ARE STILL INTACT -- SHORT-TERM STOCK INDICATORS ARE OVERBOUGHT, BUT INTERMEDIATE TREND STILL FAVORS HIGHER STOCK MARKET PRICES

EARLIER PRECIOUS METAL BUY SIGNALS ARE STILL INTACT ... Given my somewhat cautious comments on precious metals last week, one of our readers asked if recent point & figure buy signals that I pointed out are still intact. The answer is "yes". Last week I pointed out that gold and silver (and their stocks) were pulling back from some overhead resistance levels. That was partly due to a new yearly low in oil and a bounce in the U.S. Dollar. But the p&f uptrends haven't been disturbed. In Chart 1, a p&f buy signal for the streetTracks Gold Trust Shares (GLD) was given earlier this month at 61. It's still intact. [A p&f buy signal occurs when a x column (which represents rising prices) exceeds the top of a precious x column]. Chart 2 shows two recent p&f buy signals in the iShares Silver Trust (SLV) -- the first at 118 during October and a second one at 122. The SLV is up against potential resistance at its September high of 132. It needs to clear that chart barrier to resume its uptrend. But the p&f buy signals in both precious metals remain in effect. [The red numbers and letters mark the start of each month. Numbers 1-9 start January to September. Letters A-C start the last three months of the year. Hence, A is the start of October, B starts November].

Chart 1

Chart 2

COMBINING P&F AND BAR CHARTS FOR XAU ... Each charting method has its own strengths and weaknesses. That's why most professional chartists often combine them. The main value of point & figure charts is that they give more precise buy and sell signals. Bar charts, however, include a lot of other useful information. Chart 3 is a p&f chart of the PHLX Gold & Silver (XAU) Index. The XAU gave a p&f buy signal at 134 earlier this month. The subsequent down column of o's is retesting the breakout point at 132. A decisive drop below that level still wouldn't reverse the previous buy signal, but would lessen its credibility. The daily bars in Chart 4 show the XAU stalled at a six-month down trendline and its 200-day moving average. At the moment, the XAU is retesting its 50-day moving average. The p&f buy signal at 134 should be viewed as an intial probe. The XAU needs to clear its November high to give a more significant buy signal.

Chart 3

Chart 4

A INTERMEDIATE LOOK AT THE S&P 500 ... The stock market continues to rise in the face of short-term overbought readings. Most daily indicators show the market to be very over-extended and in need of a pause. I suspect part of the reason for the market's continuing climb is based on the fact that its weekly (and monthly) indicators haven't reached dangerously over-extended levels yet. Chart 5 shows the current condition of some weekly indicators applied to the S&P 500. The 9-week RSI line has reached overbought territory over 70 (more on that later). However, the weekly MACD lines are still in a strong uptrend. Although the MACD histogram has stalled bit, there's no signifiant sign of a top at this point. A more compelling case for more market strength is found in Chart 6.

Chart 5

BOLLINGER BANDS ARE STILL EXPANDING ... The weekly bars in Chart 6 show the S&P 500 trading along its upper Bollinger band. A visual glance at the two bands, however, shows that they've been expanding. Normally, expanding bands are associated with a strong trend. Contracting bands are associated with a period of consolidation or correction. The line below chart 6 measures Band Width (the difference between the two bands). Notice that it has risen to the highest level in two years and is still rising. Until it stops rising, the market rally is likely to continue. We get the same message from the DI and ADX lines at the top of Chart 6. An intermediate uptrend exists when the green line (+Directional Index) is trading over the red line (-Directional Index). The two lines crossed positive three months ago and are still diverging. The rising black line is the ADX (Average Directional Index) [which measures the difference between the two DI lines]. The uptrend usually continues until it turns back down. A signal that the market is dangerously over-extended occurs when the ADX line crosses above the green line. It hasn't done that yet. Both of the indicators in Chart 6 show that there's still some power left in the market's intermediate uptrend.

Chart 6

A SHORTER-TERM LOOK AT THE S&P ... The daily S&P 500 bar chart shows it trading over 1400 for the first time in six years. All of the short-term indicators are positive. However, the daily RSI lines are in overbought territory and daily MACD lines (although positive) have the potential for showing a short-term "negative divergence". [That's when prices reach a new high, but the MACD lines don't]. A positive sign is that the daily Bollinger bands are expanding. Even if a short-term top were to materialize in the near future, the downside risk would probably be limited to the early November low and the lower Bollinger band near 1360 (green circle). That would also put the S&P 500 near its 50-day moving average and would be a decline of less than 3%. Even that seems unlikely until the weekly indicators start to weaken.

Chart 7

POINT & FIGURE S&P CHART ... Since we started with a point & figure chart, we may as well end with one. Chart 8 shows the continuing uptrend in the S&P 500 since July. [The first buy signal was given at 1265]. Each repeat buy signal offers an opportunity to raise protective sell stops beneath the rising market. [The tighter stops are best used for short-term trading positions, while the looser stops are more suitable for longer term holdings]. The last o (down) column stopped at 1365. The S&P would have to fall to 1360 or lower to give a short-term sell signal. [The daily bars in Chart 7 show the early November intra-day low to be at 1360.98. Although the p&f chart is based on intra-day highs and lows, I prefer to see a close below a support level to give an actual sell signal]. The p&f chart also shows initial chart support to be in the 1385-1390 region (at the top of the recent breakout).

Chart 8