Thomas
DeChastelain
Memorial Archives

Bullion Charts & Commentary
posted Jan 9, 2005 at 06:21AM

Introduction

The last two months have had no lack of bearish portents and behaviours. It started with relative underperformance of gold equities. Then there was divergence in gold not making new highs in Euro's, to confirm the new USD high.

You had further divergence when gold failed to make new highs even as the USD was making new print lows. The bearish price action since then has been marked by relative underperformanc with the USD; i.e. gold was dropping faster than the USD was rising.

And yet, despite being driven to oversold levels on a daily basis, most things gold still lie comfortably at or above long term support lines.

So the big questions remains. Is this this initial leg of a longer term correction? Or is this just an initial tree-shaking excercise within a major new upleg? In a technical environment which has technical portents supporting both scenarios, which will hold dominance? And in the end, how does one trade this to make sure one doesn't get run over by the perverbial truck.

Time to digest some charts.

Bullion Charts

Daily



The failure of the 430 break-out point to hold is a very bearish development - false break-outs usually are, and imply we have seen an exhaustive excess of bullish sentiment.

One scenario to be on the look-out for would be for wave four type bounce followed by another down-leg. Five waves down and a break of the 200dma to get technical selling out of the way, and hopefully some bullish divergences could make a good entry for at least short-term trades.

Weekly



The MACD cross is bearish. Historically it has been followed by at least a few weeks more downside. Personally I don't like the look of this chart at all.

Ratio Charts

HUI/Gold Ratio



There is a difference between trading and analysis. I remember I had sold my golds when the HUI first dipped below 240, something which I did not expect to happen. Indeed I fully expected the triangle to resolve to the upside giving another buy signal and telling me to get back into golds. Of course it did not.

In the same way, one may feel bearish on gold.but if the HUI/Gold ratio breaks the resistance trend-line, a good trade would be to buy, no matter what your disposition.

TSE Gold Index/Gold Ratio



At an interesting juncture.

HUI/USD Weekly Stochastics Study




Again a chart that shows the relative underperformance, technically, of equities in relation to the USD. Although the HUI is nearing a bottoming range, the USD is nowhere near topping out.

That suggest two scenarios if the USD does embark on some kind of rally. One the HUI will start rising despite a rising USD, (a very very bullish divergence) or it is for a very difficult period indeed.

Right now I really don't know how to interpret this. The bottoming stochastics makes me near term bullish. The fact that it has nearly completed a stochastics cycle with a price above most major supports is to me also something that is bullish.

But the fact that this has happened without any appreciable movement in the USD stochastics makes me very very cautious.

HUI Charts

Daily



The 200 level continues to hold as support, despite Friday's drubbing in bullion. The 200 makes a logical swing-line. The convergance of the trend-line support and the horizontal support should also be considered.

Weekly



A mixed picture.

USD Charts

Daily



Weekly



Fundamentals aside, the charts are making a strong technical case for further USD strength. It is due for some backing and filling so seeing how that retracement goes will be telling.

Trading Thoughts

A strong dollar rally would be another victory of illusion over reality. Of course potential paper losses would be no illusion. In that respect the market is always right.

Technically there is a good case, especially the weekly USD chart, to suggest that continued USD strength is possible.

If I was to keep track of only one chart it would be the HUI/Gold ratio. A break of the resistance trend-line would be a powerful signal that a new longterm upleg would be starting.

Until then, I would at the least like to see some positive divergences on the daily before trying any swing trading. In this environment your trades either start working quickly or they don't work at all. Stops are de rigeur in my opinion.

Good Trading

Bullet Bullet Bullet