A LOT OF TECHNICAL AND INTERMARKET FACTORS WARNED OF GOLD BREAKDOWN -- LONG TERM TECHNICAL INDICATORS HAVE BEEN WEAK -- GOLD MINERS HAD ALREADY BROKEN DOWN -- FALLING CHINESE STOCKS HAVE ALSO HURT COMMODITIES -- STOCKS HAVE SNAP BACK DAY BUT ON LOW VOLUME
LONG TERM TECHNICAL INDICATORS WEAKEN... The financial media on TV spent all day yesterday trying to come up with a reason to explain gold's dramatic price plunge. I admit that I don't know why yesterday's drop was so big, or why it happened yesterday. What I do know is that a lot of technical and intermarket indicators have been bearish on gold. Although several recent messages have shown the close correlation between falling gold prices and a tumbling yen (rising dollar) and a major shift away from gold and into stocks, my February 28 message made the the bear case for gold in more detail. You may want to reread that message to get the entire story. The first three lines in that day's headline were: THE BULL MARKET IN GOLD MAY BE OVER -- LONG-TERM TECHNICAL INDICATORS WEAKEN -- A STRONG DOLLAR, STRONGER STOCKS, AND WEAK GOLD MINERS ARE ALSO BAD FOR GOLD. Let's update three of that day's price charts. Chart 1 shows the monthly MACD lines turning down a year ago and falling to a three-year low. At the same time, the 14-month RSI line peaked during 2011 and has been falling since then (down trendline). Chart 2 shows a major negative divergence between falling weekly MACD lines and the price of gold which was threatening its 2012 low near 1550. Chart 2 also shows gold having broken that support and falling to the lowest level in two years. Those bearish chart warnings were shown on February 28.
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Chart 1
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Chart 2
GOLD MINERS FALL TO NEARLY FOUR-YEAR LOW... This headline and Chart 3 were also taken from the February 28 message. The chart shows the Gold Miners Index (GDM) having already broken major chart support drawn along its early 2010 and 2012 lows which completed a major topping pattern in gold miners (see circle). To quote from the February message: "That creates a huge negative divergence between gold miners and the price of gold (brown line). Since the two markets have historically been positively correlated, the breakdown in gold miners is another strike against the bull market in gold continuing". The GDM has since fallen to the lowest level since spring 2009. And gold has had a major chart breakdown. Gold wasn't the only commodity that plunged. The entire commodity asset class tumbled yesterday. A lot of that had to do with China.
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Chart 3
CHINA WEAKNESS HURTS COMMODITIES ... The major reason for yesterday's commodity plunge was given as a disappointing first quarter GDP report from China. The fact is that falling Chinese stocks have been weighing on commodity prices for months. Chart 4 shows the CRB Index plunging to the lowest level since last summer. The dashed line shows the last peak in China iShares (FXI) during February coinciding with the last commodity peak that same month (see arrows). Both lines fell below chart support together yesterday. Chart 5 shows a close correlation between Chinese stocks (red line) and the CRB Index (brown line) since 2009. Both peaked in the spring of 2009. The 2013 peak in the FXI took place below its 2011 peak. Both have been falling together since February and have hit new 2013 lows together. The negative impact of weak Chinese stocks shouldn't be news to readers of this site. My April 5 message carried the headline: COMMODITY COUNTRIES HIT HARD BY FALLING PRICES. That message showed how weak commodity prices were hurting producers like Brazil, Canada, and Russia. Its first paragraph also observed: "Relative weakness in the Chinese stock market (which is the world's biggest importer of commodities) has also hurt demand for commodities and countries that produce them".
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Chart 4
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Chart 5
STOCKS BOUNCE BACK TODAY... Yesterday's big selloff on rising volume was disturbing. The good news is that stocks staged a snap back today (although on lower volume). Chart 6 shows the Dow Jones SPDR (DIA) regaining a percentage point. It also remains above initial chart support at 144.05 and a rising 50-day line. Chart 7 shows a similar picture for S&P 500 SPDRS (SPY). Chart 8 shows Powershares QQQ Trust backing off from its September peak near 70. The QQQ, however, remains in a five-month uptrend. It also remains above its 50-day line. Although the volume picture isn't pretty, all three indexes have maintained their 2013 uptrends. It will be interesting to see if today's low-volume snap back carries through the rest of the week.
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Chart 6
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Chart 7
