by Kevin Klombies, Senior Analyst, TradingEducation.com, LLC


Tuesday, July 1, 2008

Chart Presentation: Redux

Below are the same two charts that we included in yesterday’s issue. It isn’t that we can’t come up with something new- that is rarely a problem for us- but rather that we feel that we should make this point at least one more time before moving on to something else.

The euro has ended the quarter with a chart structure that appears somewhat similar to the equity markets into early October of 1987. As the chart below of the Swiss franc futures and gold futures points out the trend for commodity prices in general and gold prices in particular usually follows the direction of the major European currencies.

We are less concerned about what the ECB will or will not do on Thursday and more concerned with how the markets react to their decision. A fairly fresh case in point would be the 20%+ decline in the share price of Research in Motion (RIMM) following a huge earnings gain that was a penny short of the market’s frothy expectations.

In any event the euro below 1.53 with the Swiss franc moving down through .95 would be a substantial negative for the trend for commodities prices.

Finally... the second quarter has come to an end. Hopefully the markets will repeat recent behavior and move on to something new.

At right we show, from bottom to top, a chart of AMR, Valero (VLO), gold miner Barrick (ABX), Canadian natural gas producer Duvernay (DDV on Toronto), and the biotech etf (BBH).

The first six months of 2006, 2007, and 2008 tended to favor the energy theme while the back half of the last two years has led to strength in some of the non-energy sectors.

Below we show a chart of the pharma etf (PPH) and Caterpillar (CAT) from 2006 through to the end of the second quarter of 2008. This is probably the best place to start our argument.

In the spring of 2006 the share price of CAT turned lower (usually this goes with declining copper prices) and then by mid-year the trend for the pharma sector turned positive. In other words one of the first sectors to turn positive at the start of the third quarter back in 2006 was pharma.

By late summer of 2006 oil prices began to decline and the ‘non-oil’ theme widened out to include the airlines as AMR’s stock price punched up above it 200-day e.m.a. line. For the balance of the year the trend for the airlines was positive.

Early in 2007 AMR reached a peak and the trend shifted over to the perception of a shortage of gasoline supplies. This drove refiners like VLO higher into mid-year. As VLO peaked the trend changed once again to include chaos in the banking system and rising gold prices. Barrick’s stock price moved above its moving average lines and pushed on into early 2008 at which time natural gas replaced the golds as the dominant theme. Duvernay pushed above its moving average lines and continued to push through the first six months of the year.

The question now is... what will be next? While it will be several weeks before any kind of trend will truly reveal itself one potential candidate would be biotech.

Our final point regarding this topic is that the trend for AMR has been negative for the last 18 months while VLO has been negative for 12 months. To us this suggests that the gold miners (i.e. Barrick) will remain in a negative trend for the next 6 to 12 months and once the natural gas theme starts to fade it could easily be a year or two before it finds its next bottom. The chart position of ABX appears similar today to VLO at the end of 2007 (i.e. very bearish) and since the major driver for ABX is gold prices and the driver for gold prices is the direction of the European currencies... we like the argument that the euro is set to go lower.

Kevin Klombies is a prolific writer and market analyst specializing in the commodity stock market and bond commodity market trading in the energy sector. He  graduated in 1980 from the University of Saskatchewan with a Bachelor of Commerce degree (Honours) in Finance/Economics.  Click here for full bio >>