STAYING WITH GOLD STOCKS -- MARKET INDEXES BREAK MOVING AVERAGES ON RISING VOLUME -- ROTATING FROM HOUSING TO GOLD
GOLD SHARES REACH TOP OF TRADING RANGE... On September 14 I wrote that the next upside target for the Gold & Silver (XAU) would be the top of a two-year trading range in the 111-113 zone (September 14, 2005). The XAU has reached that zone and is pulling back a bit. That's to be expected. As I wrote a week ago, "While some profit-taking may appear near that resistance level, I happen to believe that the XAU will eventually break through the top of the range to resume its long-term uptrend." The monthly bars in Chart 2 show why. The XAU began its long-term uptrend at the end of 2000 and climbed impressively until the end of 2003. The box shows the two-year trading range (or rectangle) that's been in effect since then. Chart analysis holds that rectangles (like triangles) are usually continuation patterns within an ongoing trend. Since the major trend prior to the start of the rectangle was up, technical odds favor an eventual upside breakout. If and when that occurs, the next major upside target for the XAU will be its its 1996 peak near 150 (see circle).
Chart 1
Chart 2
GOLD IS DECOUPLING FROM CURRENCIES ... One of the intermarket principles that I've often written about is the tendency for gold to trend in the opposite direction of the U.S. Dollar. That also means that gold trends in the same direction as foreign currencies like the Euro. That link, however, has been broken over the last few months. The two lines in Chart 3 show a generally positive correlation between gold and the Euro (green line) from mid-2003 to mid-2005. Since mid-year, however, gold has rallied while the Euro hasn't (see circle). In other words, gold has risen in the face of a firm dollar. While some may use that fact to question the staying power of the gold rally, I take the opposite view. Currency moves are only one piece of the bull market in gold. Gold has its own supply-demand situation to deal with as well as macro-economic trends in inflation, interest rates, and global stock markets. That being the case, I take the ability of gold to rally in the face of a firm dollar as a sign of inherent gold strength. Another bullish sign for gold is that it's rising not just against the dollar, but against all foreign currencies. Charts 4 and 5 show gold hitting ten-year highs measured in Euros and yen. That hasn't happened since the 1970's which was a great period for gold and oil, but a decade-long trading range for stocks. Maybe not unlike the current situation. Gold pulled back today after reaching $470. The next major upside target for bullion is the late-1987 highs in the $490-$500 region. The moral of this story is to not be scared away by short-term pullbacks in gold or gold stocks. I believe gold to be in the middle a multi-year bull market.
Chart 3
Chart 4
Chart 5
MARKET SELLS OFF ON RATE HIKE ... The stock market reacted badly to today's Fed decision to raise short-term rates another 25 basis points. This time more technical damage was done. The major stock index ETFs shown below all sold off on a noticeable pickup in trading volume. That's never a good sign. In addition, some short-term technical indicators turned negative. Chart 6 shows the daily MACD lines turning negative in the Dow Diamonds (DIA). [Last week I warned about the negative divergence between the DIA and the MACD lines]. Chart 7 shows the 9-day RSI for the S&P 500 SPDRs (SPY) falling below the 50 line which is a sign of weakness. In addition, moving average lines were broken. All three stock indexes are trading beneath their 50-day moving averages. Chart 8 shows the Nasdaq 100 Shares (QQQQ) also slipping beneath the dashed 20-day average. The next downside target is the lower Bollinger band near 38.29. That coincides with the late August price trough at 38.26. That's where the QQQQ appears to be headed. I explained yesterday why Nasdaq weakness wasn't good for the rest of the market.
Chart 6
Chart 7
Chart 8
MOVING FROM HOUSING TO GOLD ... Yesterday I wrote about consumer discretionary stocks leading the market lower and explained that the group included stocks tied to autos, retailing, and housing. The consumer discretionary group was the market's biggest percentage loser again today along with retailers. Which brings us back to housing. The PHLX Housing Index (HGX) tumbled again today and is bearing down on its 200-day moving average (Chart 9). Its relative strength ratio has fallen to a new four-month low. Last Friday I suggested some rotation out of housing stocks into gold on the belief that rising inflation would hurt the former and help the latter. Chart 10 plots a ratio of the Housing Index (HGX) divided by the Gold Index (XAU). The ratio line has jumped to the highest level in six months. The entire concept of relative strength analysis and sector rotation is to move out of what is falling and into what's rising. And the secret is to do it as soon in the trend as possible. Admittedly, it's too soon to call this a major upside turnaround in the housing/gold ratio. But it isn't too soon to start some rotating just in case it is.
Chart 9
Chart 10
