Another Rally in The Main Stock Indices and Gold?

By: Przemyslaw Radomski, CFA | Fri, Apr 30, 2010
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This essay is based on the Premium Update posted on April 30th, 2010.

Three weeks ago we've commented on the link between the general stock market and gold, but since the situation has changed significantly since that time, we would like to provide you with a follow-up.

Let's begin with the very-long-term chart (charts courtesy by http://stockcharts.com) of the S&P 500 Index, and then we'll move to implications for gold.

S&P500

In short - we still expect to see a general stock market correction in the not too distant future, but not right away. This week there was very little change in the S&P Large Cap index chart. The recent decline meant nothing with respect to the long-term picture although it was clearly visible on a day-to-day basis.

As we stated in a previous update, in past years, when RSI levels [based on weekly closing prices] was in the 70 range, it normally remained there for months.In the past, we have also seen stocks forming a temporary top above the 200-week moving average. Since we are not presently above it, we would expect the rally to continue until we have seen the index in or slightly above the area marked on the above chart with red ellipse. Until this takes place, it is likely that we will see the RSI fluctuate near the 70 level.

Let's zoom in for more details.

SPY

Moving to the long-term SPY ETF chart, we do see some changes as compared to last week. The market has been consolidating for several days and this has caused the RSI (based on daily closing prices) to move much lower, actually touching the 50 level. This indicates that we are no longer in an overbought situation. We are therefore presently bullish as the trend surely appears to be upward. A further rally is likely given that the overbought situation is behind us.

Looking back to 2009, we see similarities. An overbought period was followed by an RSI plunge to 50 (marked on the chart with red ellipse) which quickly resulted in a stock market rally. Several weeks ago, we mentioned that this was likely to take place and we see it now (marked on the chart with blue ellipse). This has been confirmed by volume levels recently, thus validating that our analogy with 2009 is still intact. During the final part of the decline, we also saw a decline in the high volume levels. We saw this twice in 2009, during periods of consolidation and slight decline. Perhaps, our current consolidation interval is coming to an end.

The likely implications for precious metals can be surmised from a look at previous periods with similar trends. We saw PM's rally in very similar situations and we expect to see this once again. Consequently, we remain medium term bullish on gold. Still, in order to provide you with details, we need to further elaborate on the values from our correlation matrix.

Correlation Matrix

There is virtually no change to the correlation matrix for this week. Once again, the USD and precious metals are uncorrelated and the high correlation readings are seen between PM's and the general stock market. Gold continues to be highly correlated with the general stock market and therefore our previous bullish points apply here as well. The lack of correlation with the US dollar resulted from a situation where gold continued to rise in spite of the recent strength shown by the USD. We expect this trend to continue in week ahead and once again reaffirm our bullish outlook for the yellow metal.

The gold chart provides us with details.

GLD

Gold prices moved higher this week. Today the question is have we reached a local top or would we call this a pause in the rally? We feel more strongly that the latter is true. The gold rally most likely will continue over the next week or three with short periods of sideways movement possible. The situation is to some extent unclear mainly due to the lack of clarity in the self-similar pattern. In October 2009, we saw a similar period to what we've seen recently followed by a rally. We also have seen consolidation patterns come to an end. In either case, a downward movement occurred first followed by a rally. We do not feel at this time that one should bet on a downward movement in the short term. All signs point to higher gold prices in a week or three regardless of what happens in the next few days.

The short-term bullish analysis is confirmed by the GDX:SPY ratio.

GDX:SPY

The GDX:SPY ratio measures precious metal stocks outperformance vs. the general stock market. It is a useful tool for estimating when a top or bottom is in for PM stocks as this ratio usually tops out along with PMs and PM stocks.

Please note that virtually each time we've seen a top in the ratio, it was accompanied by big volume. Presently, it is obvious that the daily volume is relatively low. This indicates the top is not yet in. We see that the RSI is approaching 70, which usually means that a top is near, but this level has not yet been reached.

Additionally, when the ratio moved above the declining resistance line near the 0.4 level, it quickly moved upwards to the 0.45 range. We haven't seen a rally this big so far, which - once again - suggests that the rally is not over yet.

Summing up, although the general stock market has been rallying strongly since February, we again state that the correction, which we still feel is inevitable, may still be some time away. The market appears to have gained some strength of late, which should hold off a short-term correction for the near future, which has bullish implications for the gold market. Additionally, the analysis of ratios reassures us that the final top for this rally is not yet in. Targets and short-term details are available to our Subscribers.

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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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