TECHNICAL analysis expert Joe Meyer answers some key questions on the direction for gold and the all-share index.
You previously said that the US stimulus package will most likely fail. Why is this?
Let's start off by asking this question: what is the stock market?
Now most people will simply respond and say that it is a measure of profitability. If prices advance it implies that profits are rising, or at least there is the anticipation by people that profitability will increase.
The flipside is equally true. When prices fall, this is because profitability decreases or will decrease. Most people will not have a problem with any of these statements.
It is only after some time that you realise it is not that simple! Shares fall after an interest rate reduction or rally after bad results. After excellent economic numbers, share prices dip and at other times they climb after bad numbers!
I believe that one of the best ways of looking at the market is to see it as a gauge for measuring a feeling of well-being, and specifically economic well-being.
This emotion is driven by crowd behaviour and eventually expressed as stock prices. Furthermore, crowd behaviour is patterned and predictable. It is for this reason that stock prices are patterned and predictable.
Now, if we use stock prices as a thermometer reading to see how sick the patient is, they tell us the patient is very, very ill. Economically and emotionally, there is a total lack of well-being.
People are feeling down, they feel depressed and they don't want to own stocks. They do not want to spend and any stimulus thrown at them will simply go into the kitty. They will not go out there and open their purses. They will much rather cover debt, keep up with house and car instalments and live conservatively.
This, as evidenced in stock prices, implies then that whatever the US government does, it cannot revive this miserable, sick patient. Only when the patients start feeling better emotionally will they participate in economic activities.
This will probably not be before July 2009, after which we will see a bounce in stock prices throughout the second half of 2009. This is evident from the chart we show in this article.
Gold stocks: what is your view looking at the charts?
I can only say what I see, but please do not get me wrong: I am not a gold bear! On August 14 2008, DRDGold was trading at about 400c. We then published an article that said it should easily reach 634c. It is now trading at about 800c. So when we see upside we call for it.
Gold is most likely still in a decline which started at the all-time high of $1 038. This decline will continue towards $700 and possibly $600. When we wrote on January 29 that we are faced with a decline in gold it was trading at $916. We said we allowed for one more push higher and that did happen, but since then gold has gone nowhere.
People are betting on a rapid re-inflation because of world stimulus packages. Now, you can only have inflation if you have spending or buying pressure! As explained earlier, we do not foresee even the slightest probability of this.
As far as gold shares go: we think that DRDGold and Goldfields will fall most in comparison to AngloGold and Harmony.
What about our local JSE, what do you see for the tradable Alsi40 index?
An auto-pilot is a very useful instrument and pilots find it of great help. Still, it is off course most of the time. Every so often it takes a reading, plots itself in terms of the present course and makes corrections. It ends up exactly at the pre-programmed destination.
I want to compare this with technical analysis. We take a view, we make corrections and eventually we can see where we will end up while staying more or less on course in doing so.
You know that we called the November low on the level and on the day. We then pre-warned of an advance to follow. On December 10 I said it was becoming increasingly probable that we would not reach the high we then thought achievable and I maintain this stance.
We should be very close to a significant high that will most likely be followed by a decline into July when the Alsi40 reaches 13 000. See the daily chart of the Alsi40.
How can people get more information on technical analysis?
People interested in knowing more about technical analysis should note that we are hosting a technical analysis seminar on Saturday February 28 in Cape Town, and one in Johannesburg in late March. You can email us at info@marketsignals.co.za for information or visit the website for more detail.
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- Fin24.com