Long Term Chart Symmetry
US T-Bonds and Gold - December 2004
Daan Joubert
Over the years, various analyses based on Chart Symmetry have been published here and elsewhere on the internet. Recently the focus of the reports has been on monthly charts of the US 10-year bond and of Gold - charts that showed each of these instruments were approaching key values. Strong long term market support for the T-bond and equally strong resistance for Gold, the latter which has now been penetrated.
Since the previous analysis over a month or so ago, the situation has developed to where it is now again time to bring these charts to wider attention. An analysis of the US Dollar-Yen rate is also included.
Readers who have not read about Chart Symmetry should first read the Appendix where a brief summary of the methodology is give.
The US 10-year Treasury Note
The master gradient, identified as line M, was generated between the two points marked with an 'x' and is the market support line of the 10-year bond during the long term 1957-1981 bear market. All other lines were derived from the gradient of line M; these lines were generated on the chart from the single point of origin marked with an 'o'.
Line F, for example, is the second shallower derivative of M, i.e. the gradient of M was multiplied by the Fibonacci ratio (0.618 . . ) and the result again multiplied by the ratio to be transformed into an even shallower gradient. It is obvious that line F was the market resistance line of the bond during the period from 1954 to 1967. It again played a minor role during the bull market that followed the 1981 peak in the yield.
Channel A-B is the direct inverse of line F, while channel X-Y is the direct inverse of the master gradient, M. Note that line B has as its origin the peak that was by the mid-70's the most prominent high on the chart of the yield. This line then picks up the much more recent lows in the yield with quite good accuracy.
The most surprising aspect of this analysis is the good fit between line X - the direct inverse of the master line and generated from the all time high in 1981 - and the recent highs in the yield. Twenty years and more after the point that was used as the origin, the line on two occasions acted as key market support during periods of a sell-off in bonds. In January 2000 the monthly close on the yield was 6.66% and at that time line A had a value of 6.68%, for a difference of only two basis points.
In May and June this year, the yield also peaked right at the line. The actual month-end values of the yield were 4.66% and 4.63% respectively, while the values of the line on those two dates were 4.65% and 4.60%, again with good accuracy after such a long time. At the end of November, the yield was at 4.35%, with the line at 4.40%. It has a value of 4.36% for the end of December, which means that if the bond market weakens any further, the break through the 20 year trend line could come as early as this month.
It is quite obvious that XB is a very large pennant. A pennant is a continuation pattern, just like the triangle. This implies that a break above line X would begin a bear market for bonds that should have the yield reach above the previous high in 1981. A first level of market support for the yield would be along line A, with a value of 6.60%. If there happens to be a break above line A, then line F becomes the target at 11.31% and rising.
The US 30-year Treasury Bond
The master line is again the overall market support of the main bear market, but the slope is steeper than that of the 10-year bond, because the start of the chart is 10 years later than for the 10 year T-Note. Line F is again the second shallower derivative of M, with X-Y the inverse of line F. Here the analysis differs from that of the 10-year, in that channel A-C is the shallower inverse of line M and not the direct inverse of M.
Again, A-Y is a large pennant with - as for the 10-year - the yield having just completed leg 5 of the pattern and thus ready for an imminent break higher into a new bear market.
One analysis like this on the Bond market would be striking, given the outstanding fit between the chart and the derived lines. Two similar if not exact duplicates are beyond coincidence.
The Gold Price
The monthly chart of the gold price shows two major peaks in the late 70's early 80's. It has been found that where there is a distinct 'bifurcated top' such as this - or a bifurcated bottom, as the case might be - the centre 'notch' of the pattern is very often situated on a strong trend line, as in this example where the master line was defined using that point.
Line I is the inverse of the master gradient - giving good confirmation of the gradient - and channel A-B is the steeper derivative of the master gradient.
M-I is a symmetrical triangle. If one disregards the 'temporary' break above M - which can be done in the case of bifurcated breaks - the gold price was on leg 5 of the triangle when it suddenly reversed direction after just breaking above $400 in February of 1996. That was when the Gold Carry took off and flooded the market with an over-supply of gold, pushing the gold price down below the triangle in a premature break that was steep and sustained - to the great delight of the Central Banks, we know.
The decline subsequently turned pattern M-B into a very large triangle of which leg 4 has just started. The triangle is not symmetrical, but the two sides are Fibonacci derivatives of each other - something that applies to the vast majority of narrowing patterns.
Experience over the years with many triangles has shown that when a break takes place prematurely, while still on leg 4 - that is, without completing leg 4 and starting off on leg 5 - the subsequent move away from the triangle tends to be steep and sustained.
With the gold price now having broken clear of triangle M-I, there is a minor possibility that the price could pull back for what can be termed a 'goodbye kiss' on line M - a final touch before resuming the bull market. Since the October close was practically right on line M - at $425.6 and the line at $423.20, for a difference of just 0.5%, which means the price has already 'recognised' the trend line - the probability for a goodbye kiss is low.
Technically it would seem that the major Gold bull market has now taken off.
Dollar-Yen
Master line M is clearly evident, with A and B paralell to M. F is the shallower derivative of M, with F3 and F4 the third and fourth shallower derivatives of the line M.
The monthly chart of the Dollar-Yen rate shows how the Japanese currency appreciated against the dollar since 1972, when the currencies started to 'float' after Nixon closed the 'Gold Window'. By 1995 the dollar had declined from ¥357 to just ¥83.7, for a loss in relative value of 76.6%. The dollar then rallied, in the wake of the 1995 Trade Pact that provided for bilateral support for the dollar and opened the door on the Yen Carry.
With the exception of the over-shoot in 1985, the initial part of the dollar bear market followed the steep bear channel, M-B, very well indeed. The break from the channel first established megaphone M-F and then continued into the development of triangle F3-F4.
As happens in about 85% of cases where triangles develop, the price completed the 5 legs needed to define the triangle fully before breaking out. After the break, the Yen at first settled into a tight trading range - evidence of the intervention by the Bank of Japan - but has now resumed the trend lower. Technically, dollar support is either along the outside of the megaphone - at ¥88.65 - or at the level of the low on the monthly close, at ¥83.7; substantially lower than the ¥102.4 where it is trading at this time of writing.
Conclusion
The long term view for the US Treasury long bonds is very negative, once the pennants are broken - which event now appears to be imminent, unless there is another brief rally in the bond market.
The gold price has just broken through its significant resistance at $423, while the Yen had already broken below the triangle in September last year to signal a new Dollar bear market, before becoming totally range bound.
The evidence is clear that we are at the cusp of major changes in the global financial scene, with the US likely to experience some significant turmoil in months to come.
Appendix:
Chart Symmetry is a method of chart analysis based on observations that we had made quite some time ago and incorporated in custom software. The observations are:
- Prices tend to reverse or change trend along preferred gradients. A preferred gradient is revealed by suitably placed, parallel trend lines, or channels, that pick up far more small and large reversals that what one would expect
- There are more than one set of such preferred gradients, in both directions
- The different preferred gradients can be converted into each other through the use of the Fibonacci ratio
When an analysis is done with Chart Symmetry, the methodology is quite rigorous. One has to begin with a single trend line, generated between two significant points on the chart and which has been successfully evaluated as being a preferred gradient. Using this now known gradient, additional lines are generated - this time from just a single point on the chart - that have gradients which are
- the same as that of the master gradient, i.e. parallel to the master line
- the inverse of the master line, i.e. the same slope, but with the sign changed
- different gradients, steeper and shallower, that were derived from the master gradient
These lines are then used to identify various patterns on the chart that enable the analyst to draw conclusions and make assumptions about the future behaviour of the price.
Reactions at pattern boundaries are either firm reversals or breaks that lead to strong and sustained moves in the price. The reactions as a rule occur very accurately along these lines, even after a period of many years on monthly charts. Variations between the point of reversal and the trend line are often less than 1%, even after periods of 10 and more years, which makes Chart Symmetry perhaps the most accurate of charting methods.
Season's Greetings
Kind regards to all and happy trading.
daan joubert
December 2004
daanj@kingsley.co.za
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