The Bigger They Are, The Harder They Fall
That widely recognized proverb by James Corbett is perhaps overused, but
it succinctly describes the current state of the US equities market.
Before the tragic events of Sep 11-th, the mainstream financial media
had succeeded in convincing many novice investors that the downturn of
the equities market in 2000 and 2001 was only temporary. They preyed
on their fears that to sell now would only guarantee that
they would miss the next big rip-snorting bull rally that is surely
just around the corner. The sell off in equities that followed the
events of Sep 11-th has finally thrust some of the problems of the world
economy, financial system, and equities market into the limelight. Many
investors are only now beginning to have a sense that something is wrong.
The mainstream financial media may succeed in convincing the public that
the terrorists are entirely to blame for our economic ills. On the other
hand, regular readers of Gold Eagle are well aware of the fundamental
and technical evidence that has been mounting over the last couple of
years. It suggests we are in the early stages of a shift away from paper
assets such as equities and into hard assets such as gold and silver. This
article reviews some of the supporting evidence from the perspective of
Classical Charting.
Technical Analysis and Classical Charting
Of the many books on investing and trading that I have read over the
years, two of them are real standouts. They are Technical Analysis
and Stock Market Profits by Schabacker [1],
and Technical Analysis of Stock Trends by Edwards and Magee [2]. The approach to technical analysis presented in
these texts is based on the notion that certain patterns recognizable
on bar charts have the property that when prices breakout of the pattern
boundary, the ensuing price movement is fairly predictable. Each
pattern serves the role of a fingerprint of a particular dynamic of
accumulation or distribution. The price movements that follow breakouts
are predictable because when market participants are faced with a sudden
loss or gain, it is in our nature as humans to react to some degree in
a fashion that is based on emotions of fear or greed. In terms of our
emotional make up, humans are the same today as we were 5000 years
ago. This is the reason Classical Charting works today as well as it
did when it was developed.
I find that Classical Charting is the best technical analysis tool
out there, but of course this is only my opinion. It's not perfect,
but then there is no approach to price forecasting that is. (Indeed,
if there were a secret order to the movements of markets, someone would
sooner or later discover the secret and quietly accumulate all the world's
wealth). In the material that follows, I am not claiming to know what
will happen. Perhaps Ms. Cleo would claim to know, but I sure don't. What
I am presenting is what Classical Charting suggests is likely to
happen, based on my interpretations of the current chart structure.
Equities versus Gold
Throughout history economies have exhibited boom and bust cycles. In
the more recent period since stock markets have been in existence, they
too have exhibited boom and bust cycles. A closer examination of these
long period cycles suggests that when equity prices fall that money
tends to flow out of equities and into hard assets such as gold and
silver. Conversely, when equity prices rise money tends to flow out of
hard assets and into equities. See references [3],
[4] for an excellent discussion of some of the
fundamental macro-economic reasons for such cycles. Given that such cycles
exist, how does one analyze them from a Classical Charting perspective?
One of the more popular quantities used for analyzing this cycle is the
ratio of the Dow Jones Industrial Average to the price of gold bullion.
In a sense, the ratio represents the exchange rate between equities and
gold bullion. By dividing the two quantities we eliminate the common
medium of exchange, US dollars in our case. (As another example, we could
find the exchange rate between Sterling and Swiss Francs by dividing
the corresponding exchange rates with respect to US dollars or another
common currency).
After the legendary bull market in equities of the 1920's, the ratio
peaked at 18.68 troy ounces of gold per Dow point in Sep 1929. At that
time gold had a legislated exchange rate of $20.67 per troy ounce. After
the crash of 1929, the ratio plunged to a low of 1.96 in Jul 1932. President
Roosevelt signed the Gold Reserve Act on 30 Jan, 1934. This outlawed the
domestic ownership of gold by private individuals. The price was soon
after raised to $35 per ounce by presidential order. The ratio peaked
again at a value of 28.60 in Feb 1966 when the Dow Jones Industrial
Average briefly moved above 1000 mark. The inflationary decade of
the 1970's brought the ratio all the way down to a low of 1.03 in Jan
1980. The ratio has since moved steadily higher during the bull market
in equities of the 1980's and 1990's. It recently reached a high of
44.79 in Aug 1999.
The chart below shows the ratio of the Dow Jones Industrial Average to
the price of gold in US$ per troy ounce over the period from mid-1969 to
the present. Each bar represents the range of the ratio over a period
of a calendar month (the ratio was computed once per day using the
closing value of the Dow and the London PM Fix for the price of gold).
The current bull market started in Jan 1980 when the ratio was only
1.03, and trendline T1 defines the uptrend. The pullback in the ratio
that coincided with the crash of the stock market in 1987 completed an
easily recognizable Rising Wedge pattern. Note that the 10-11
area served as overhead resistance when the ratio rallied in 1973 and
again in 1976. The ratio again attempted to move above this level in
1993 and 1994, and then completed a 3 year Continuation Head and
Shoulders Bottom pattern when prices finally brokeout to the upside
in early 1995. After the next downtrend in the ratio becomes established,
this level will likely act as intermediate support as depicted by the
support line S1. A possible Head and Shoulders Top pattern is
becoming apparent where the right shoulder is still in the early stages of
development. The pattern won't be confirmed and completed until prices
decline and breakdown below the neckline NL. The bull trendline T1 is
still intact (although it was challenged recently).
Note that logarithmic scaling was used for the vertical axis. This is
very important when charting any quantity with a large numerical
range. Logarithmic scaling has the property that changes that are
equal in a percentage sense will also appear on the chart as equal
distances. For example, consider a stock that has moved from $1 to
$10. With logarithmic scaling, the move from $1 to $2 will appear equal
to the move from $2 to $4, or from $5 to $10. This is meaningful from
the perspective that a fixed dollar amount invested in shares would
produce the same profit in each case.
In the event that a confirmed downtrend develops in the ratio at some
point in the future, what might be a reasonable downside target for the
eventual low? I suggest that 0.66 might be an approximate target value. My
reasoning is based on the observation that the last high (44.79) and low
(1.03) of the ratio both overshot the previous high (28.60) and low
(1.96) marks respectively. The recent high of 44.70 represents a ratio
of 1.57 relative to the previous high of 28.60. Dividing the last low of
1.03 by 1.57 gives the suggested target of 0.66. For a target of 0.66,
if the Dow Jones Industrials were to fall back to 5000, the implied gold
price would be roughly $7575.
To gain further insight into where the ratio may be headed in the
future, we will examine both sides of the ratio in more detail from the
perspective of Classical Charting.
Equities Market
Let's start with a a look at the equities side of the Dow to Gold
ratio. The monthly bar chart below shows the Dow Jones Industrial Average
over the time period from mid-1969 to the present. There are two aspects
of the chart worth noting. First, the long term trendline T1 of the bull
market that began in the fall of 1982 was just recently violated. The
break of this trendline does not carry with it any particular price
targets or any really good clues as to what will happen next, but it
does send a clear signal that something has probably changed.
The second notable aspect of this chart is the extended period of
consolidation during the 1970's up to the start of the current bull
market in the fall of 1982. In absolute price terms, the market basically
went nowhere during this period. The price action of this period can be
interpreted as an extended Continuation Head and Shoulders Bottom
pattern with multiple shoulders. (The chart above does not go back
far enough in time to see the entire pattern). The breakout above the
neckline NL in the fall of 1982 proved to be a very profitable buy signal.
The mainstream financial news media and the financial services companies
that feed them with advertising revenues are still busy promoting their
mantra of Buy and hold stocks for the long run. All I can say is
that anyone who has total faith in this notion should have a closer look
at how equities in general performed during the decades of the 1970's (and
the 1930's as well). While one might look at the above chart and argue
that stocks never really lost much of their value during the 1970's,
the losses where significant in terms of the real purchasing power of the
dollar. In the late 1970's, no matter where you lived you could walk into
your stodgy ol' neighborhood bank or S&L and get a Certificate
of Deposit with interest rates in the high teens. In general, equities
were a rather poor vehicle for the storage of value and purchasing power
during this period.
Now let's look at the chart structure of the more recent price action of
the Dow Jones Industrials. The weekly chart below shows the period from
Jan 1997 to the present. The period from early 1998 to the present can
be interpreted as a possible Head and Shoulders Top pattern. If
prices break below the neckline NL, the pattern would be confirmed and
the price target would be roughly 5250 using logarithmic scaling and an
assumed neckline level of 8150. Because the neckline NL is gently rising,
the price target will depend on the actual level of the neckline when
the breakout occurs. If we discard our knowledge of current events for a
moment, chart symmetry suggests that the right shoulder of the pattern
might take another 10-12 months to form. In the event that the pattern
is completed sooner than that, it would tend to suggest that the price
target might be met rather quickly. What will happen? Only time will tell.
Daan Joubert made the timely observation that the period from May
1999 to Jul 2000 could be interpreted as a possible Diamond Top
pattern (see [5], [6]).
Unfortunately, the upside breakout just fizzled out and prices
consolidated in a sideways fashion, another case of pattern evolution.
The period from May 1999 to Sep 2001 is more difficult to categorize
in terms of classical chart patterns. My own interpretation is that
it is probably best described by what Schabacker called a Drooping
Bottom pattern. (The term refers to the shape of the bottom boundary
of the pattern, and not the change in trend). My mention of the
failed Diamond Top pattern was not intended in any way to be
a negative reflection on Daan. In fact, I did so because it was the
perfect opportunity to recommend all of
his articles
and those by fellow South African chartist
Dr. Clive Roffey.
While virtually every business report on radio, television or in
the newspaper begins with a quote of the Dow Jones Industrial Average,
that index is hardly a good measure of the overall equities market. It's
really a special sector of the equities market as there are only 30
companies in the index. The sector of technology stocks has already
crashed from its peak in the spring of 2000 (though the
mainstream financial media still uses the term pull-back or buying
opportunity with continuing regularity). One look at a chart of the NASDAQ
Composite Index (not shown) leaves little doubt. These two sector indices
are telling rather different stories. What index should be used for
a broad measure of equity performance?
There are a number of indices that provide a broad measure of equity
performance, such as the Standard and Poors 500 Index. I chose the
Geometric Value Line Composite Index because it averages even
more stocks and for other reasons that will become evident in the
section to follow on gold stocks. The weekly chart below shows the
most recent leg of the current bull market in equities that began
in late 1994 and the consolidation and reversal that followed it.
In terms of Classical Charting, the index is telling a rather definitive
story; and one that is decidedly bearish. Note how the market
sold off in late 1998 (which coincided with the collapse of the huge
LTCM hedge fund) and then rebounded into mid-1999 but failed to reach
new highs. This was the first warning sign that perhaps something had
changed. The successively lower highs that followed produced a well
defined bear trendline that was tested on several occasions and each
time it held. This together with the sell off in early 2001 formed a
possible Descending Triangle pattern. Schabacker categorized
these patterns as having a strictly bearish interpretation when they
appear after an extended rally. (As opposed to symmetrical triangles
which can function as continuation patterns where prices take a rest for
awhile, and then continue in the direction of the previous trend). This
pattern was completed and confirmed by the recent sell off when the
markets reopened after the Sep 11-th terrorist attacks. The measured
price target is roughly 230-240 when logarithmic scaling is used. The
recent rebound reached the 340 area for a retest of the breakout where
significant overhead resistance was encountered. The 340-350 area should
continue to serve as overhead resistance.
To conclude the topic of the equity markets, Classical Charting suggests
that weakness is gradually spreading through the universe of equities.
The technology sector as measured by the NASDAQ Composite Index
has already crashed. The trend of the broad market as measured by
the Geometric Value Line Composite Index is now in confirmed bearish
territory, with a downside target of about 230-240. The sector of the
market represented by the Dow Jones Industrial Average is showing signs
of weakness, but the case can be made that the Dow could consolidate in
the current area for as long as another 10-12 months.
Gold Bullion
Now let's look at the gold side of the Dow to Gold ratio. The chart below
shows the price of gold in US$ per troy ounce over the time period from
mid-1969 to the present. Each bar represents the range of the London Gold
PM Fix over a period of a calendar month. The most obvious feature is the
powerful 10 year move from the $34.90 low made in Jan 1970 to the blow off
high of $850 in Jan 1980, a move of 2,436%. The 20+ year period since the
high has been mostly downhill, punctuated by a few sharp but relatively
brief rallies. However, gold has actually retained a reasonable fraction
of its gains in percentage terms. The recent low of $252.80 in Jul 1999
represents a 40% retracement of its gain using logarithmic scaling. The
Jul 1999 low is still an increase of 725% relative to the Jan 1970 low.
My own interpretation in terms of Classical Charting of the period from
the 1980 high to the present is best described by what Edwards and Magee
called a 3 Fan Correction. The pattern is characterized by 3
successive bear trendlines or fanlines, each a little shallower than
the previous. The pattern is completed when prices breakout above the
third fanline F3. For the month of Oct 2001, this would require a move
above $322.20 for a breakout. The swing target price after completion of
this pattern is $7845 (using a ratio of $850.00/$34.90 projected from an
assumed breakout of $322.20). This price projection is not too
different from those calculated by other authors that used various
fundamental considerations (see [7],
[8], [9]). The period since late
1997 to the present can be interpreted as a possible Rounding or
Saucer Bottom pattern. A move above the $325.50 level is needed
to confirm and complete this pattern.
Let's have a look at the more recent price action of gold. The chart
below shows the time period from Jan 1999 to the present. Each bar
represents the range of the London Gold PM Fix over a period of one
week. After the sharp rally in Sep 1999 that coincided with the Washington
Agreement, prices gradually fell back within the boundaries of a possible
Falling Wedge pattern. This pattern was completed and confirmed
when prices brokeout above the upper boundary in the first week of Dec
2000 (that was not long after gold stocks had bottomed in early Nov
2000). Prices moved sideways to slightly lower, retesting an extension
of the upper boundary of the wedge. (After a breakout from a Falling
Wedge, prices often move sideways in a rather dull fashion). In late May
2001 prices quickly ran up to the 292 level (coincident with the GATA
conference in South Africa) but then just as quickly fell back. At that
point in time, the price action going back roughly 1+ year could be
interpreted as a possible Head and Shoulders Bottom pattern.
After the events of Sep 11-th, prices quickly rallied up to the neckline
NL of this pattern and then stalled. Although prices moved to levels
slightly above the neckline, there was no convincing breakout and prices
have since fallen back negating the Head and Shoulders Bottom
interpretation. This is a case in point that is indicative of one of
the practical problems with Classical Charting. Possible chart patterns
can form, but a breakout never occurs, or a breakout occurs and then
prices fail to move to the anticipated target. What often happens is
that prices evolve in a manner where a new and different pattern of
longer duration forms. If prices can hold above the $273-$274 area,
one possibility is that this failed pattern will further evolve into a
possible Rounding or Saucer Bottom pattern. That pattern would
also be completed when prices move convincingly above the $292 level.
This could take as long as 3-4 months from implied time symmetry of the
entire pattern. If a breakout occurs, the target price will be about
$333. This is above the fanline F3 that goes all the way back to the
Jan 1980 peak of $850. If the Saucer pattern is completed, prices may
move up quickly to test F3, but it will not be surprising if significant
overhead resistance is encountered there.
On a positive technical note, prices recently moved above the bear
trendline T1, but have since pulled back. The trendline T1 is defined
by the peak in early 1996, and the peak in late 1999 that coincided with
the Washington Agreement. (The first defining contact point is not shown
above, but can be seen on the monthly chart).
If prices do eventually breakout above fanline F3, the completion of the
3 Fan Correction pattern does not carry with it any reliable
hints as to the nature of the predicted rally. It's worth noting that
more often than not, the moves that follow the completion of 3 Fan
Correction patterns are initially rather gradual in nature. They
often evolve into larger Rounding or Saucer Bottom patterns.
With growing political tensions, we will have to take a wait and see
attitude. However, I won't be surprised if things unfold more slowly
over the near term than many expect.
To summarize the topic of gold bullion, recent price action has provided
some encouragement that the confirmation of an intermediate term bottom
may not be too far off. A move above $292 is needed to confirm a further
short and intermediate term uptrend, while a move above $322 is needed to
confirm a new longer term uptrend.
Gold Stock Market
The question of how to best quantify the performance of the gold stock
market and in particular the suitability of the Philadelphia Stock
Exchange's Gold and Silver Index (PHLX:XAU) has been the subject
of several recent articles. The addition of Phelps Dodge (NYSE:PD)
to the XAU in July 2000 was widely greeted with complete disbelief.
Phelps Dodge is engaged mainly in the production of Copper and other base
metals, and it clearly reduced the correlation of the XAU with the real
performance of the gold stock market. Apparently someone finally awoke
from a coma. Phelps Dodge was dropped from the XAU effective 8 Oct 2001.
>From the perspective of a small individual investor such as myself,
there is a more basic flaw of the XAU as a measure of the health of the
gold equities market. The XAU is an arithmetic average of a basket of
stocks. It is not a simple average, but a weighted average with
weighting that is proportional to relative market capitalization. The
index essentially tracks the market value of a hypothetical portfolio
in which the number of shares of each security is adjusted so that their
relative market values mirror their relative market capitalization. For
example, on 18 Oct 2001, mega-hedger Barrick Gold Corporation (NYSE:ABX)
represented 26.05% of the total market value of the hypothetical
portfolio, while Agnico Eagle (NYSE:AEM) represented only 2.26% of
the total market value. This type of weighted average is particularly
useful to large institutional investors who need to be concerned with the
liquidity of their holdings. Now that Phelps Dodge has been eliminated
from the index, it is a reasonably good measure of the movement of
"big money" in and out of gold stocks.
On the other hand, the small investor also needs to be concerned
about liquidity, but the universe of stocks with adequate liquidity is
much, much larger. This is one advantage the small investor
has over large institutional investors, particularly in a sector such
as gold stocks where some of the most attractive companies have only
a modest float. As viewed from the perspective of a small investor, a
capitalization weighted average paints a rather biased picture of what
is going on in the universe of gold stocks. To provide a picture that is
better suited to the small investor, one possible approach is to construct
an index using a geometric mean, rather than an arithmetic mean.
To compute the geometric mean of a basket of N stocks; multiply
all of the individual prices together and then take the N-th root of
the result. The result can then be scaled by a fixed constant if so
desired. (For example, many indices are scaled to start with a value of
100). While this method for computing a mean might seem odd at first, the
geometric mean exhibits a rather interesting property. The percentage
change in the geometric mean that occurs when one of the stock prices
changes by some given percentage, is the same for all of the
stocks in the basket regardless of their absolute price. For example, the
percentage change in the geometric mean that occurs when one component
stock moves from $1 to $5, is the same as when some other stock makes a
move from $10 to $15. Given this property, the geometric mean represents
how the component stocks are performing in a percentage sense, where all
the component stocks contribute equally. If this appears to be somehow
related to logarithms, you are correct. An equivalent way to compute the
geometric mean is to sum all of the logarithms of the component
prices together, divide by N, and then compute the anti-logarithm
of the result.
My reasons for examining the Geometric Value Line Composite Index in
the section above on equities should now be more apparent. I wanted an
unbiased index, but I also wanted to provide some comfort to those
that might be very skeptical of an index computed using a geometric
mean. Indices based on a geometric mean are certainly not
new, though they are quite often ignored or misunderstood.
As an example, I constructed an index based on the geometric mean of a
basket of 16 gold and silver mining stocks that trade on US exchanges. The
index was scaled by a fixed constant to start with a value of 100. The
table below lists the stocks that were used to construct the index which
I call the Geometric Gold and Silver Stock Index.
Stocks in the Geometric Gold and Silver Stock Index
| Company Name | Symbol |
| Agnico Eagle Mines, Ltd. | NYSE:AEM |
| Barrick Gold Corporation | NYSE:ABX |
| Bema Gold Corporation | AMEX:BGO |
| Cambior, Inc. | AMEX:CBJ |
| Coeur d'Alene Mines Corporation | NYSE:CDE |
| Echo Bay Mines, Ltd. | AMEX:ECO |
| Freeport-McMoRan Copper and Gold, Inc. | NYSE:FCX |
| Glamis Gold, Ltd. | NYSE:GLG |
| Gold Fields, Ltd. | NASDAQ:GOLD |
| Hecla Mining Company | NYSE:HL |
| Homestake Mining Company | NYSE:HM |
| Kinross Gold Corporation | AMEX:KGC |
| Newmont Mining Corporation | NYSE:NEM |
| Pan American Silver Corporation | NASDAQ:PAAS |
| Placer Dome, Inc. | NYSE:PDG |
| Royal Gold, Inc. | NASDAQ:RGLD |
My criteria for including a company in the index were kept as simple
as possible to avoid unwanted bias; it must have actual gold production or
royalty income (no exploration only companies), it must be traded on
a US exchange (so that quotations are available in US$), and historical
data should be available going back to at least mid-1995. Although
its not that difficult to switch companies in and out of the index,
I imposed the data requirement to avoid the hassle of these details
(the scaling constant must be adjusted whenever there is a change). I
wanted to go back to at least mid-1995, since the most recent leg of
the bear market started in early 1996. Going back further in time than
mid-1995 eliminated some interesting companies. The 16 different companies
appear to provide a good snapshot of the industry as a whole. Some of
the companies with lagging performance are included (some of the silver
stocks and the mega-hedgers) along with the leaders.
The chart below shows the Geometric Gold and Silver Stock Index over the
time period from Jul 1995 to the present. Each bar represents the range
of the index over a period of one week. (With basic daily data, the index
can only be computed twice a day; once at the open and once at the
close). The chart readily shows just how ugly the most recent leg of
the bear market was for the typical gold stock. At the late 2000 low,
the typical stock in the index traded at just 16% of it's market price
in Jul 1995. However, there is mounting evidence that the intermediate
trend may be in the early stages of a reversal. The period from mid-2000
to May 2001 formed a Head and Shoulders Bottom pattern that
was confirmed and completed to the upside turning the short term trend
up. The measured price target of 32.68 has yet to be reached although
the May 2001 highs came pretty close. Prices appear to be contained
for now by the resistance from the bear trendline T1, and the overhead
resistance line at R1.
Some recent visits to some of the gold stock discussion forums gave
me the impression that many reacted to the failure of bullion to move
above the $292 level after the events of Sep 11-th, with great dismay
and disappointment. It seems that many had the expectation that gold and
gold stocks should have lifted off like a pop bottle rocket on the 4-th
of July. The resistance line R1 at the 31-ish level on the chart above
provides some explanation for why it did not. It appears that there is
still a supply coming from those disenchanted buyers who took positions
during the period from mid-1998 to early-2000 when prices traded above
R1. A more extended period of consolidation may be needed to absorb
the supply. The bullish bias remains intact, provided prices don't
breakdown below the 23.5 level (the extension of the neckline NL). If
prices breakout above R1, this would complete a larger Rounding
or Saucer Bottom pattern. The price objective of the pattern is
roughly 58.68 using logarithmic scaling.
Before we leave the topic of gold stocks, let's examine the relative
performance of the Geometric Gold and Silver Stock Index with other
popular gold stock indices. The chart below shows the performance of 5
different gold stock indices over the time period from Jan 1999 to the
present. To facilitate the direct comparison of the different indices
in percentage terms, each index is scaled to reflect the percent move
relative to its recent low of late 2000. To minimize the amount of
clutter on the chart, only the weekly closing prices are shown.
The Amex Gold Bugs Index (AMEX:HUI) is currently leading the way higher,
followed by my Geometric Gold and Silver Stock Index, the CBOE Gold Index
(CBOE:GOX), the TSE Gold and Precious Minerals Index (TSE:TGL), followed
by the Philadelphia Gold and Silver Index (PHLX:XAU) in last place. The
components of the HUI are all unhedged producers, and many of these stocks
have roughly doubled in value from their late 2000 lows. It should be
no surprise that the performance of the XAU is dead last. Anglogold,
Barrick Gold, and Placer Dome have relatively large weightings in
the XAU, and all of them have sold forward a large fraction of their
future production for several years. A higher gold price will not
automatically translate into higher earnings for these companies, and
their performance will very likely continue to lag the performance of
the unhedged producers. For the small investor, capitalization weighted
indices such as the XAU present a picture that has been significantly
biased by the fallacious axiom that bigger is always better.
Should you want to make future comparisons, the table below
presents the dates when the indices bottomed in late 2000, and
the corresponding low prices. To get updated values that are consistent
with the above comparison chart, divide the current index value by the
low price from the table, then multiply by 100.
Recent Lows of Several Gold Stock Indices
| Index Name |
Symbol |
Date |
Low |
| Geometric Gold and Silver Stock Index |
N/A | 14 Nov, 2000 | 16.14 |
| CBOE Gold Index |
CBOE:GOX | 15 Nov, 2000 | 25.69 |
| AMEX Gold Bugs Index |
AMEX:HUI | 15 Nov, 2000 | 35.31 |
| TSE Gold and Precious Minerals Index |
TSE:TGL | 25 Oct, 2000 | 3469.40 |
| Philadelphia Gold and Silver Index |
PHLX:XAU | 25 Oct, 2000 | 41.61 |
To summarize the topic of gold stocks, recent price action has confirmed
a short term Head and Shoulders Bottom pattern. However, gold
stocks must rally above their May 2001 highs to confirm a new intermediate
term uptrend. While current events could quickly change the picture, the
general consolidation that gold stocks have experienced since their May
2001 peaks will likely continue for awhile longer, perhaps as long as
another 3-4 months. The current action within the sector appears to be
rotational. Some of the quality unhedged North American shares completed
2+ year bottom patterns back in Aug 2001 (NYSE:AEM, NYSE:GLG, NYSE:MDG
for example) and have since pulled back to retest their breakouts. More
recently, the quality South African stocks appear to be gaining strength
(NASDAQ:GOLD, NASDAQ:HGMCY, NASDAQ:DROOY) and may breakout from similar
bottom patterns in the near future.
Summary and Conclusion
The uptrend of the Dow Jones Industrial Average to Gold ratio that began
in Jan 1980 is still intact. Analysis of the Dow and Gold charts suggest
that the uptrend in the ratio is losing strength. On the weekly charts
the Dow is forming a possible Head and Shoulders Top pattern
and gold a possible Rounding or Saucer Bottom pattern.
The trendline on the monthly chart of the Dow Jones Industrial Average
that is associated with the secular bull market that began in the fall
of 1982 was recently violated. The period from early 1998 to the present
on the weekly Dow chart can be interpreted as a possible Head and
Shoulders Top pattern. If the pattern is completed, the price target
will be roughly 5250. It seems likely that this pattern will eventually
be completed as there is mounting evidence that suggests the weakness in
equities is spreading. The NASDAQ Composite Index which is representative
of the technology sector has already crashed. The Geometric Value Line
Composite Index which is more representative of the broad market recently
completed a Descending Triangle Top pattern on the weekly chart
with a price target of 230-240.
The possible 3 Fan Correction pattern on the monthly gold chart
requires a move above about $322 to be confirmed. The implied swing
target of this pattern is about $7845. The monthly gold chart also shows
a possible 3+ year Rounding or Saucer Bottom pattern that will
require a move above the $325.50 level for completion, with an implied
price target of $420. The weekly chart shows a shorter duration possible
Rounding or Saucer Bottom pattern that will require a move above
the $292 level to be completed, with an implied price target of $333.
The price of gold briefly moved above the bear trendline defined by
the peak in 1996 and the rally in Sep 1999 that coincided with the
Washington Agreement. Should prices breakout from the $292 level, the
$325-$335 area will likely act as overhead resistance that will take
time to overcome. Over the near term, the consolidation in gold stocks
that began after the May 2001 peak will likely continue for awhile longer.
John Peterson
segel_flieger@yahoo.com
30 Oct, 2001
Copyright © 2001, John Peterson, all rights reserved. This article may be
freely distributed in whole.
References
- Technical Analysis and Stock Market
Profits, by Richard W. Schabacker, 2nd Edition, 1937,
ISBN 0-273630-95-4
- Technical Analysis of Stock Trends,
by Robert D. Edwards and John Magee, 16-th Edition,
1987, ISBN 0-910944-00-8
- Kondratiev Revisited, Gold and the Long-Wave Economic Cycle,
by Antal E. Fekete. Presented to the Babe-Bolyai University, School of
Business Administration, Sf. Gheorghe, Romania, on May 2, 2001.
- The Kondratiev Cycle and Secular Market Trends,
by Mike Alexander, 14 May 2001.
- The Dow Diamond,
by Daan Joubert, 1 Jul 2000.
- The Dow Diamond - Revisited,
by Daan Joubert, 4 Sep 2000.
- A Case for Gold,
by Doug Casey, 15 Mar 2001.
- Calculating Gold's Price Potential,
by Michael Miller, 25 Feb 2001.
- A Possible Gold Price Scenario 1998-? (Revised),
by Joseph M. Miller, 25 Sep 2000.
Disclaimer
The above statements are personal observations and opinions, and should
not be interpreted as investment advice or as a solicitation to buy or
sell securities. The charts and data presented were derived from sources
that were believed to be accurate. However, no warranty, expressed or
implied is made as to their accuracy.
Printer Friendly Version
Email this Article