Gold and Gold Shares Face an Important Test in the Next Few Days

• Short-term equity rally is still intact.
• Dollar Index  experiences major upside breakout.
• Commodities experience a very favorable divergence but the DJP needs to break above $37 to confirm.

US Equities

Last week we talked about the fact that the S&P had broken out to new highs but that, several indexes who hadn't  had begun to run up  against resistance. That, I thought, could well cause the market to pause for a few sessions and then move on to new highs as the short-term momentum indicators were not overstretched. That is what appears to be taking place now as, for example, the MSCI World Stock ETF, the ACWI  recently paused at the old highs and on Wednesday went on to register a new one. The fact that it closed on its low shows how important it is that this breakout be maintained. If the price now fails to  hold above  the low for last week’s small corrective move  at $60.50. the  breakout would turn out to be a false one. False moves to the upside are often followed by above average declines, as unwary longs who bought on the breakout  are pressured into selling.

That seems unlikely as the KST is still rising and is not particularly overstretched at this time. Of course, if the breakout proves to be false this would result in a reversal in the KST from a relatively low level, which would be a bad omen in its own right. Right now though the KST is still rising, so I am assuming a positive outlook.

Chart 1

Chart 2 shows that my Global Diffusion indicator is still deeply oversold and has only just reversed to the upside. Again that’s an encouraging factor since it suggests that global equities are likely to rally on a broad front.

Chart 2

Market breadth has not yet thrown up any serious discrepancies. The A/D Line has confirmed the latest S&P high but is nevertheless at resistance in the form of the extended red up trendline. So too is the cumulative NYSE upside downside volume line, which is back to its previous high.

Chart 3

While the short-term picture is bullish and the trend indicators continue to flag a primary bull market, longer-term momentum indicators continue to flash a warning signs. Leading the market lower is the value Line Arithmetic, which has just experienced a long-term KST sell signal. This is not necessarily the kiss of death as we see from the false negative triggered in 2005.  However, the current signal comes after 5-years into a bull market. Unless you believe that the current trend is a secular or very long-term bull this negative MA crossover is a warning that the current  bull market  is close to being complete.

Chart 4

US Credit Markets

Last week I pointed out that the 5-year yield was caught between the 1.8% and 1.5%. It still is. The KST has started to turn up more strongly than it had last week, so I am expecting that it will continue to challenge the 1.8% area.

Chart 5

At the other end of the yield spectrum the 30-year series is experiencing a falling Special K and short-term KST, the exact opposite as the 2-year  trajectory.

Chart 6

As a result, the spread between the two shows a sharp reversal favoring the short-end of the yield curve. In most cycles when short-term rates gain on longer term ones  the latter eventually turn up as well. However, the initial flattening  of this spread is a sign of a healthy economy. It is only when short rates rise above longer-term ones that a recession warning is given. That's not to say that  every recession is preceded by  a yield curve inversion ( i.e. above the red 1.0 line), merely that I would be more concerned if the spread was closer to the red horizontal line.  Based on current trajectories that seems to be a long way off.

Chart 7

US Dollar Index

This week the Dollar Index broke out from a huge base and looks headed much higher over the course of the next few years. The minimum upside objective called for by the pattern is for an eventual move in excess of 100 and the breakout is being supported by a rising long-term KST..

Chart 8

The current short-term technical condition is a bit overstretched, so some form of digestion of recent gains  would be in order. If past bull markets are anything to go by such pull-backs, while often sharp, are typically difficult  to play. Better to focus on the long-term bullish trend in such situations.

Chart 9

Precious Metals

Most of the time gold and the dollar move in opposite directions. However, in the last few weeks the dollar has been rising sharply and gold has really been moving sideways.  Now our inverted dollar diffusion indicator is deeply oversold and that may  provide the price of the yellow metal with an escape hatch as the dollar corrects. However, the GLD really needs to break and hold decisively above the upper area of the trading range at $130 if it is to trigger some primary bull market signals.

Chart 10

The gold shares in the form of the GDX are also in a tight trading range. However, while this ETF has been moving sideways the bullish percentage of its components continues to advance. This presents  a subtle hint that under the surface things are better than the GDX price would have us believe. The indication being that a break above $27.50  is more likely to take place than a drop below the red trendline at $23.

Chart 11

Commodities

Last week I pointed out that the Dow Jones UBS Commodity ETN was experiencing a positive divergence with the number of commodities registering net new highs over a 10-day period. That discrepancy continues today to the effect  that  the number of net new highs is slightly positive even though the price itself is pretty close to registering a new low. All divergences need to be confirmed by prices responding to them in a positive way. In this situation we would look at a decisive break above the red trendline and previous minor high, say to $37.

Chart 12

If commodities do experience a rally one to look out for is copper. The price remains below a very important down trendline but the intermediate and long-term momentum are positive. In the event that the price rallies above the down trendline at to $3.25 this would almost certainly turn the short-term KST into a bullish mode. As a result  higher commodity prices would be expected.

Chart 13

Good luck and good charting!

Martin Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.