The Analysis of Gold and the USD Index Once Again Provides Key Trading Signals

By: Przemyslaw Radomski | Sat, Apr 3, 2010
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This essay is based on the Premium Update posted on April 2nd, 2010.

In the March 26th commentary we wrote that given the historical significance of the RSI being at 70 and the fact that the USD Index has just touched the 50% retracement of the previous rally leads us to anticipate that the recent USD Index rally will stall out and retrace. In addition, a rally for PMs and PM stocks is looking more and more probable.

Since this is exactly what happened, we believe you might want to read our thoughts regarding U.S. Dollar's and gold's next move. Let's begin with the long-term USD Index chart (charts courtesy of http://stockcharts.com), which is once again the main driver of PM prices (we will write more about that particular topic in the following part of this update).

US Dollar Index

In the previous Premium Update we emphasized that the Fibonacci 50 percent retracement level of the previous (2009 Mar - Dec) decline. Key Fibonacci levels have historically been reliable in identifying key support and resistance, especially on the U.S. Dollar market.

Consequently, the U.S. Dollar moved considerably lower - visibly below the trading channel. This non-confirmation of a breakout is a bearish sign for the USD Index, and a bullish one for the PMs. Please note that once again the RSI at 70 meant a local top in the U.S. Dollar and a local bottom in gold and silver.

Another bullish signal for gold comes from the analysis of its correlation with the U.S. Dollar.

GOLD, Silver, US$, HUI, S&P500 Correlation Index

The correlations of the U.S dollar is starting to become more and more aligned with the metals sector, which is something we were looking to see develop as this is what we've seen in the gold / USD markets right before the huge September - December 2009 rally.

Please take a look at the 30-day column at the values of correlation coefficients for USD and gold / gold stocks - they are significantly negative for the first time in the last several weeks. Moreover, at the same time, the correlation between gold / gold stocks and S&P 500 is much lower. This means that gold and corresponding equities are once again mostly USD-driven in the short run.

Silver is still highly correlated with the general stock market, but it doesn't invalidate points made above, as silver tends to move closely with stocks because it has multiple industrial uses.

Therefore, the correlation matrix shows further evidence of the return of the highly negative correlation between USD and PMs. Additionally, the link between gold, mining stocks and the general stock market is much weaker than it was the case during the past several weeks. As mentioned earlier, this is positive news for PMs, because the return of this correlation is what we expected to see before the next big move up.

SPDR Gold Trust Shares

In our previous commentary we've summarized that the bullish analysis of gold is definitely still intact given the strikingly similar pattern in place back in August of 2009 where we had some consolidation followed by a significant rally.

Please note that the similarity is visible not only in the price itself but also in the RSI and Stochastic indicators. Based on the above chart it seems that even if we are going to see gold move a little lower from here, it will not change the bullish implications of the pattern. Let's take a look at the short-term chart for more details.

SPDR Gold Trust Shares

Looking at the short-term chart do not anticipate for the move to be immediate. Sure, it may be the case that gold rallies right away (that's why we had mentioned opening long positions in metals), but based on the similarity to the late August 2009, it seems that we may see gold moving slowly higher instead of rallying immediately. This means that if we see a small correction that takes gold $20 lower or so, it should not make you worried. We will let our Subscribers know if we believe that higher prices are not to be expected in the short- and medium-term.

Summing up, the situation in gold is still bullish - the technical analysis patterns are in place, and the strong negative correlation with the U.S. Dollar serves as a confirmation. Over 6-times bigger version of this essay with many important charts, ranking of juniors, comments on the physical PM market, and - most of all - timing details for the end of the current rally in PMs is available to our Subscribers.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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