More Charts! Metals and US Stocks

By: Michael Kilbach | Fri, Jun 1, 2007
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The editorial we published last week incorporated long term charts for gold, silver and the Dow Jones Index with a twenty seven year support line. This week we expand on that same line of thought.

In the above charts you will notice:

  1. Dividing two markets together to create a ratio helps us determine which market is outperforming the other market. For example, in the chart above, when the black line heads higher, the NYSE is outperforming Silver and when the black line heads lower Silver is outperforming the NYSE.

  2. We used several US stock markets to give an overall picture of what is generally happening to US stocks when compared directly to silver and gold. Or conversely, what is happening to silver and gold in comparison to US stock markets.

  3. Each chart has a very long term support line of about 27 years. In technical analysis support lines are important as they usually represent key areas of support and resistance. When the price of a market approaches a support line it will regularly cause a market to pause or bounce higher. This support line represents a "line in the sand" where investors are ready to buy back a market as it hits this key psychological barrier and possible opportunity to make money. Often support lines are reached after long, aggressive price declines are ready for a key point to either rest or bounce off of it. We believe markets do not move in a straight line and therefore key turning points such as support lines are often used for counter rallies.

    Also, as a general rule, the longer the line of support has been in place the more significance it carries. For example, a support line that has been in place for a few days is much less important than a support line that has been in place for a few years or in this case decades.

    Additionally, in technical analysis, once a key support line has been broken that same line now becomes a line of resistance. What was once an invisible floor and barrier to the downside now becomes a ceiling and barrier to the upside. Once a support line is clearly broken the trend usually continues lower and the new resistance is not easily broken to the upside.

You may be wondering if these markets are landing on a key line of support that has existed for 27 years, why wouldn't these ratios bounce off of this support and start a new prolonged advance.

In the financial markets anything can happen. We think that the ratios will likely bounce off of these key lines of support. In fact you will notice that many of them have already bounced a few times along the line of support. But we believe that investing is about probabilities. Based on our observations of historical major market movements we have devised a set of guidelines to assist us in our investment decisions. We believe major market trends are like large swinging pendulums with huge momentum as massive amounts of capital flow from one asset class to another. In our opinion one major market trend will not end until an extreme is met in the direction traveled. You will notice the major trend from about 1980 to 2000 was for US stocks to outperform commodities. We now believe that major trend has reversed and will accelerate when these twenty seven year support lines are breached.

To help illustrate other key lines of support we have provided a second set of charts.

In the above set of charts you will notice:

  1. In most of the charts the falling ratios paused on the key twenty year support lines. Notice how many of them bounced for many months as the psychological barrier held as support for the declining ratio? The support line was a resistance area but not a launch pad for a new major advance.

  2. In most cases once the support line is clearly broken that line becomes resistance and the ratio does not break back through to the upside.

  3. The same question asked about the twenty seven year support line could be asked in regards to this twenty year support line. If a support line has been in place for twenty years why wouldn't that line of support hold and provide a base for a new US equities advance? History now tells us that the twenty year line of support was merely a place of rest or support to slow down the ratios decent before it headed lower to the twenty seven year support lines.

From a very short term perspective, a stronger stock market with softer, performing commodities is not a shock to us. After a great start to what we think is a major commodities bull market, we expect periodic slow downs, pull backs and breaks. We recognize that markets do not move in a straight line and expect corrections when market sentiment and enthusiasm gets overheated. When we keep the big picture in perspective, our investment decisions become easier and less stressful. When we look at the long term trends, the day to day price movements become nearly irrelevant. In the short term we may be experiencing a strong stock market with weaker commodities, but in the big picture the trend is clear in our opinion. We expect the twenty seven year support lines to be breached and once this occurs, we expect commodities to advance quickly. This is why we have been positioning ourselves in silver investments.

At we always keep the big picture in perspective. We do not try to pick exact tops and exact bottoms of a particular equity or market. Instead we look at the big picture and use our custom built timing charts to generally average into the market during times of pessimism and out of the markets during times of enthusiasm. We first try to locate major bull markets and identify opportunities to enter those markets on intermediate pull backs. We use our timing charts to help us identify the end of this commodities bull market and then when appropriate enter the next potential major bull market. You may receive access to our timing charts by visiting our website and subscribing to our newsletter. Or you may subscribe to our free newsletter and read free commentary about our opinion on the markets at



Michael Kilbach

Author: Michael Kilbach

Michael Kilbach

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