Gold and The General Stock Market - Rallying or Topping?

By: Przemyslaw Radomski, CFA | Fri, Apr 9, 2010
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This essay is based on the Premium Update posted on April 9th, 2010.

In the March 31st 2010 commentary, we've analyzed the general stock market along with the price of gold, and one of the things that we wrote was that a significant decline is not very likely at this point and the general market could rally further.

This is what we've seen since that time, but stocks have been recently rising on a relatively low volume, so you might wonder if it made us change our mind as far as the situation on the general stock market is concerned, and how it would affect the PM sector.

Let's begin with the long-term SPY ETF chart (charts courtesy of http://stockcharts.com.)

SPY S&P500 SPDRs

In the March 31st 2010 commentary we also wrote that it might be the case that stocks move above this level and then verify it as support.

Based on the above chart it seems that the general stock market appears to be ready for a small verification of its recent breakout. This situation is unchanged from last week as far as price is concerned. The RSI has maintained its solid 70 level with more time slightly above than below.

However, the volume has decreased visibly during the very recent upswing, which is a bearish signal. Therefore, based on the above chart a move lower from here appears very likely in the short term. Additional confirmation comes from the DIA ETF and from the Nikkei 225 index.

SPDR DJ Industrial Average ETF Trust

A glance at the DIA Dow Jones ETF Trust shows that it has already broken its rising support line and this has been verified. Note the increased volume as this downswing unfolded - this is a strong verifying signal that the correction has already begun.

Given today's level of globalization and mobility of capital we can expect many market indices to move at the same time. This does not mean that they would perfectly reflect each other, but the turning points are the main directions in which the main stock indices go are very often in tune. Let's take a look at the Japanese stocks to see what may be waiting just around the corner.

Tokyo Nikkei Average

As you may see on the above chart, the Nikkei 225 index (Japanese stocks) suggest that the stock markets around the world are to take a breather here, as it has just moved to the strong long-term resistance level created by the 38.2% Fibonacci retracement of the huge 2007 - 2009 decline. This is a strong resistance level, because the decline that the retracement is based on is also a very important - not to mention that it is a multi-year one.

Therefore, consistent with last week's observations, we might need to see a verification of the previous high before stocks rally further. As you read in the following section, this may trigger a small consolidation in PMs.

So, what does this mean for PM Investors and Traders? Let's take a look at our correlation matrix for guidance.

Correlation Matrix

The correlations of the U. S. dollar with gold and gold stocks have become less negative. We were looking to see an alignment here and this is exactly what is taking shape, although the strength of the correlation has weakened. The 30-day values which were negatively correlated last week have nearly all become less correlated, i.e. closer to 0 or no correlation of any kind. Gold and its corresponding equities are indeed mostly USD driven for the short run.

However, what is really interesting is the 10-day column and very high readings for the PM sector and the general stock market. Although this does not necessarily mean that the main stock indices will once again become the main driver of the PM prices, it should make you cautious as far as short-term is concerned.

Silver held its high steady correlation with the general stock market. This is due to its multiple industrial uses as compared to other metals.

Therefore, the USD and PM's continue to have negative correlations, a fact that has us hold onto previous expectations of a move up soon to be imminent. Gold increased it correlation with the general market as well which continues to support our view of the weeks ahead for PM's. Speaking of gold, let's take a look at the long-term gold chart.

SPDR Gold Trust Shares

Gold has and will most likely continue to trend upwards in the coming weeks. Though a small correction may be likely very soon, it is probable that the upward trend will be delayed only for a very short period of time. Look for the volume to increase after this brief correction and expect the upward trend to resume probably no later than at the end of this month, most likely sooner than that.

The big news this week is that the self-similar pattern which we were referring to in many previous reports may be losing its accuracy. At this point it is unclear which part of the upswing are we currently in, it the current move up is to look just like the September - December 2009 one. Therefore, we need to use other techniques and wait for the situation to crystallize before we can once again use the self-similar pattern that we referred to in the past. The short-term chart and many more timing details are available to our Subscribers.

Summing up, we are still bullish on gold in the medium term; a brief pause or correction is likely to occur short-term but the rally is to resume relatively soon. The way gold behaves during the next several days will also let us know if the previously analyzed self-similar pattern is still in place, and if so, what does it suggest for gold in the following days/weeks.

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, CFA

Author: Przemyslaw Radomski, CFA

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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