Gold in Yen Breaks to the Upside. Is this the Start of a Broader Trend Feeding Back to the US Dollar Gold Price?

• IWM continues to rally but Relative Strength action still lags.
• Dollar diffusion indicator starting to turn down.
• The Gold (GLD) experiences a strong outside bar on heavy volume.

US Equities

Chart 1 shows the Coppock Curve for the S&P 500 ($SPX) . This indicator was designed to identify major stock market lows by reversing to the upside from a sub- zero reading. The late 2001  reversal was  a false signal. However, in the last 100-years that has been by far the exception  as the Coppock has built up a reputation for pretty good accuracy. This indicator is not normally used to identify tops because bull markets take longer to develop than bear trends, which means that the indicator typically peaks prematurely. However, on those occasions where the Coppock makes two peaks during the course of a bull cycle the secondary top has often developed close to the final market turning point. Currently the indicator is in a declining trend  but we need to see some confirmation with say, a 12-month MA crossover.  Consequently I am showing this indicator, not so much as a sell signal but to remind us that long-term momentum is certainly consistent with a market top, even though seasonal factors and a favorable third year presidential cycle would suggest otherwise.

Chart 1

The rally dating from mid-October remains intact but is showing signs of tiredness.  Usually  it’s possible to identify an important support point, such as a previous low and up trendline or a reliable MA crossover that can offer a signal as to the rally’s demise. In the current situation the advance has been so steep that this is not possible.   We can however, point to a couple of oscillators that suggest the market may be in the early phase of peaking. One of these is the Swenlin Trading Oscillator  (!STOBNYC) in Chart 2. The arrows show that elevated peaks in this series have typically been followed by a decline or some ranging action. This indicator topped out  several days ago and is warning that the NYSE Composite ($NYA) could be vulnerable. Note also that the series of declining short-term peaks and troughs, as flagged by the red and green lines, will remain intact if the latest Swenlin sell turns out to be a valid signal.

Chart 2

One of the weakest areas prior to the September peak were stocks represented in the Russell 2,000 or more specifically the IWM.  Earlier this week the price of this ETF experienced a bearish two bar reversal. These patterns normally have an effect for between 5-10 bars, which in this case would be days. However, when perched on top of an overbought market these formations often have the effect of a domino, as the near-term weakness implied by the two day price pattern causes longer-term indicators to roll over.  Note that the two previous IWM peaks were also signaled by a one day patterns. There was also a two bar reversal that developed just after the rally began, which clearly did not work, probably because the market was oversold at the time. I used it as a justification for a test of the lows at the time, which was definitely not a good call.

Chart 3

Now however, we see in Chart 3 that the McClellan Oscillator (!MCOSIRSML) for small cap stocks has peaked. Interestingly, this indicator made a new high  for the period covered in the chart but the price did not. That’s a sign of exhaustion to me when a breadth oscillator reaches a significant new high yet the price series it is monitoring  cannot.

Chart 4

Finally, the Relative Strength line for the IWM (IWM:$SPX), in Chart 5, continues to trace out a series of decisively  lower peaks as the price remains in the upper area of its trading range. We saw a similar but less egregious situation in 2012 and that was corrected with a break above the two green trendlines. Were that to happen it would signal that the market was more interested in significant new highs by year-end rather than a digestion of recent gains.

Chart 5

US Credit Markets

I have been saying for some weeks that the exhaustion move experienced by bonds (TLT) a few weeks ago needs more time to digest previous gains before bonds could take advantage of a positive long-term technical picture and move higher. The KST is only slightly above zero but, barring a rush to quality from a falling stock market, there are probably another couple of weeks to go before those higher prices will be seen.

Chart 6

The Dollar

My diffusion indicator monitoring cross dollar relationships in a positive trend has been bullish throughout the recent sharp US Dollar ($USD) rally. However, we can see in Chart 7 that it has finally started to roll over. Not surprisingly since Chart 8 indicates that the Dollar  Index  ($USD) has reached significant resistance.  That suggests that a correction is in the cards. However, the bullish action of the long-term KST, which monitors primary trends, tells us that we are better to focus on the big picture rather than short-term  counter-cyclical corrections, which are notably difficult to play.

Chart 7

Chart 8

Precious Metals

The Gold Trust ETF, the GLD, broke below key support a couple of weeks ago but has since rallied back to a position that is just below the breakdown point. Since the MACD, in Chart 9 and the inverted dollar diffusion indicator (!PRDIFCUR) in Chart 10 have both started to turn  the break will probably turn out  to be a failure. Note the selling climax that took place at the recent lows and, following a few quiet sessions, a strong increase in volume on Friday. The other bullish point arises from Friday’s very strong outside bar. Even so, it’s going to be important to see if the price can move and hold above the horizontal green trendline next week.

Chart 9

Gold (GLD) has two potentially bullish short-term factors going for it. First a possible correction in the US Dollar ($USD). To appreciate that relationship compare the inverse dollar diffusion indicator (!PRDIFCUR) in Chart 10 to the gold price. The second factor arises from the fact that the Switzerland is holding a referendum on whether the currency should be backed 20% by gold (current holdings 8%) on November 30.  A win for the conservatives would mean the purchase of 1500 tons by 2019. Most observers expect the vote to be negative but if the market senses a win for the yes crowd that would likely push prices up. According to a recent Reuters article, “on a five-year deadline, that’s 300 tons a year, roughly the average amount investors accumulated annually through exchange-traded products from 2003 through 2012.” More importantly this vote, if successful, could well be a leading indicator for other countries.

Chart 10 also shows that a break above the dashed down trendline at $120 would confirm that the recent downside break was a whipsaw. Since whipsaws are normally followed by strong moves in the opposite direction of the whipsaw a break a move above $120   could open up the possibility of some primary bull market signals being triggered.

Chart 10

We already have one such indication for the price of the yellow metal and that is when the price is expressed in yen (GLD:$XJY). This relationship is shown in Chart 11, where you can see that an upside breakout has materialized in the last week. Such action is also being supported by the positive action from the KST.

Chart 11

If the breakout holds this will be a significant technical development as we can see from Chart 11, which is plotted in monthly format. The Gold In Yen price ($GOLD:$XJY) looks as though it was forming a head and shoulders top. However, action this week shows that the topping structure is probably not going to work. Remember though, that this is a monthly chart and it’s not yet the end of the month. One reason why this could be so consequential is the fact that the long-term KST has gone bullish and is at a fairly subdued reading.

Chart 12

Finally Chart 13 compares the gold/yen (GLD:$XJY) price to the Gartman Gold/ Japanese Yen ETF (GYEN). The fund tracks the relationship reasonably well but the volatile nature of some of the bars indicates that market orders can run into problems.

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.