DOW TURNS DOWN -- GOLD BULL MARKET IS BASED ON MORE THAN IRAQ
SELLING PRESSURE INTENSIFIES... Last Friday we used the ADX line (and its two accompanying lines) to show the absence of a trend in the market during its recent advance. That led us to conclude that, absent a trend, the market would probably start to weaken from the top of its trading range. Unfortunately, that same ADX indicator is now betraying new trend direction. The problem is it's to the downside. The three lines at the bottom of the Dow chart are related. The green line is the buying pressure line -- while the red line is the selling pressure line. The black line is the ADX (Average Directional Index) line. The ADX is based on a smoothed difference between the two other lines. After three months of relative indecision, the red line has crossed above the green line by the widest margin since last September. That's a bad sign. What's worse is that the black ADX line is starting to rise for the first time since October. A rising ADX line usually implies the start of a new trend. The fact that the red line is the one rising indicates that the new trend is down.
Chart 1
GOLD BREAKS 15-YEAR RESISTANCE LINE... Back on December 20, we showed gold bullion testing a 15-year down trendline extending back to 1987. That line sat near $350. Gold has now exceeded that long term bear line by about $20 (closing near $370 today). That puts gold prices almost 6% above that major resistance line. Normally, we require a 3% penetration to convince us the upside breakout is for real. We certainly think this one is. Our next upside target in gold is $400 -- the peak reached at the start of 1996. We believe that the bull market in gold represents a generational shift out of stocks and is far from over.
Chart 2
GOLD VERSUS STOCKS... We believe there's a lot more behind this gold bull move than war jitters. The charts below show why. Historically, gold moves in the opposite direction of the stock market. That's because gold is a hedge against bad times. It doesn't matter if the threat is from inflation (like during the 1970s) or deflation (like now). The fact is gold is tied to the stock market -- but as an alternative investment. Gold prices peaked in 1980 and were in a bear market for approximately twenty years. Stocks bottomed during 1982 and were in a bull market for most of those twenty years. The charts show those two major trends turning at the same time from 1999-2001 (see green and red circles to the right). It seems pretty clear that the big bull market in stocks ended right around the time the new bull market in gold started. The moral of the two charts is that each asset class has its own time to shine. From 1982 to 2000, stocks were the place to be. Since 2000, gold has been the preferred asset. Since these are twenty year trends we're talking about, we don't expect them to end anytime soon. That's why we believe this bull market in gold is still in its early stages. The media is attributing stock market weakness and gold strength almost exclusively to the Iraq situation. These charts suggest, however, that there are much larger forces at work here than Iraq.
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THERE'S ALWAYS A BULL MARKET SOMEWHERE... This is something a smart man once said. Our job is simply to find it and go along for the ride. The first chart below shows an example of a bull market. Gold prices have exceeded their 1999 peak and risen to the highest level in six years. The reasons don't matter. The second chart (which is linked to the first) shows a bull market about to start. The Gold (XAU) Index is still in the "right shoulder" of a major "head and shoulders" bottom. It hit a seven-month high today, but hasn't even broken out of its base yet. With gold having broken out already, it's just a matter of time before gold stocks follow suit.
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