Dr. Clive RoffeyOnce again we enter the realms of utter stupidity in Thursdays sell off in the gold shares. This is the classic end of the final leg of the massive broadening patterns that are evident right across the board on the gold shares. These formats are all variations on the double bottom pattern. The shares may appear to be trading in different ways but they are all variations on the same theme. It is a classic example of the group effect at work. Anglogold is at the end of a huge flat bottom triangle whereas both Goldfields and Harmony have both formed broadening patterns and Rangold a double bottom. The ultimate conclusion must be that these are all bottoming patterns at the end of a correction that has been in place since April 2002. Most of these base patterns commenced in July last year. This implies that the market has put a plug into the haemorrhaging. Bases of this magnitude usually result in serious upside catapults. I am well aware that the current doom and gloom cannot envisage such a move but that is the beauty of technical analysis. I must reiterate that this whole sell off is NOT the start of a new bear trend but the END of a massive base formation.
The base patterns on the golds, platinums and resource stocks are the complete opposite of the patterns on the general equities. Whereas the gold stocks have bases implying an upside move the equities have serious topping out patterns indicating a bear market.
The Dow looks dreadful!!. I have continuously detailed the huge double top pattern on this chart going back to 1998. This is a seven year top and formations of this magnitude are not resolved in a few months, they take years. Thus I am looking for at least a three year bear market on the Dow that could easily extend to five or eight years. This top is not a plaything or a mirage. It is a huge signal that an extremely serious change of trend has taken place. It also indicates that the fundamentals that drove the 21 year bull market from 1977 to 1998 have changed and also that the fundamentals that produced the sideways top for the past 7 years have also changed. A brand new set of fundamental parameters will emerge that are not yet obvious to the market. I cannot overemphasize the importance of the Dow, S&P and NASDAQ top patterns. My downside count for the Dow is to 4700. I do not expect this to be achieved for at least three years or even longer. But I am convinced that the break under the ultra critical 10 350 support has far greater implications than a minor correction. The next support level is around 9 700. If that fails to hold then the stage is set for a major bear market that will impinge on all other leading industrial bourses.
But the critical data is in the gold market. When I look at the long term pictures of the gold shares on the JSE I am staggered by the upside potentials. Yes, the market has been in a substantial correction since April 2002. But bases have been forming since July last. I am well aware that these bases have been a drain on the patience and psyche of investors but bases are a necessary intermediate phase between significant changes of trend. It is very rare for a trend to suddenly reverse direction. In most cases a period of indecision and uncertainty exists prior to confirmation of a price direction alteration.
On Thursday last I was involved in a TV debate between a fundamentalist, academic and myself as the technical analyst. It was stated by the opponents to technical analysis that it is only good for short term trading but cannot be used for long term. In view of this regrettably inaccurate statement I am going to devote a large portion of this issue to the longer term aspects of the gold market as well as equities.
Any technical analyst knows all too well that fundamental values have a habit of changing rapidly due to unexpected announcements, a la Enron and that only 30% of any share price movement is attributable to company data, the other 70% is related to market and sector forces.
Let's start with the Rand price of gold. But before launching into the data I must warn that some of the analysis will lead you to think that I have gone totally mad. But I am happy with the analysis and I believe them. The projections will take time to materialize but I would not automatically write them off as the ravings of a lunatic just yet.
In order to study the long term implications of this data it is necessary to employ Elliott Wave analysis. His basic tenet was that all bull markets, irrespective of duration or size, move in a five wave format. In the above chart of the Rand price of gold the seven year I-II correction occurred between 1986 and 1992. The nine year period from 1992 to the end of 2001 was wave III of the bull market. This was, as is usually expected, the strongest bull movement so far. Since the end of wave III the chart has mapped out a three year classic triangular pattern.
Elliott maintained that triangles usually occurred in the III-IV corrective slot. The implication is that once the triangle has ended it will signal the end to corrective wave four and herald the start of the final bull market movement into wave five, that is still to come.
Elliott further maintained that wave V MUST go well above wave III, just as wave III went well above the top of wave I. This indicates that the longer term picture for the Rand price of gold is to well above the R3 800 an ounce previous peak!!
There is often a Fibonacci relationship between waves III and V. In this case wave III was a long strong wave and it is unlikely that wave V will repeat this. The most common relationship is for wave V to be 61.8% of the total move in wave III. If this is the case then I would look for the Rand price of gold to move to around R5600 Rands per ounce or R170 000 Rand a kilo. Timing indicates a three year period as the most likely scenario.
I am convinced that your immediate response is "Never". Well I believe it will occur!! The trigger for this move will be a price above the short term resistance at R2 700 an ounce.
This analysis does not indicate whether there will be a huge surge in the $ gold price or serious weakening of the Rand or even a combination of both. But it dispels the hackneyed concept that a strong $ gold price must automatically lead to a strong Rand and indicates a de-coupling of the Rand.
US long bond interest rates have been in a continual decline since 1982, that is 23 years. But the data has mapped out a complete Elliott bear market set of counts down to 5. The implication is that the actual bear market on interest rates bottomed at the end of 2003. That would give a 21 year Fibonacci downtrend. The past two years have witnessed a churning in a base area. Although the long term down sloping channel remains intact there is every reason to believe that the rates have been forming a serious base ready for an upside break into a new bull market. Also note that the RSI oscillator has been refusing to confirm the new lows for a long time. A break back above 5% would trigger a likely trend reversal back to test at least the 6,5% level within the next three years. Note the divergence sell signal that indicated the top of the interest rate run in 1982.
I have previously detailed my Elliott Wave analysis of the Dow. Note the divergence sell signal that indicated a topping out area in 1999. Also note that the main upward trend on the RSI in the bottom frame has been broken. All the oscillators have grouped together in their selling zone. All together the data on the Dow looks horrible. I could not care less about 100 point bounces, the Dow has smashed under its critical 10 400 support and these are the final death throws of this global leader. The downside projection is back to well under 5 000 in a time frame of around three to five years. The bill market lasted from the bottom in 1974 to 1999, a 25 year trend. A ten year correction from 1999 to 2009 would not be out of place.
Put the US long bond interest rates together with the Dow and there is a clear correlation. Rising interest rates are not conducive to bull market behavior whilst falling rates are beneficial to bull markets. It is interesting that the bond rate data and the Dow are both indicating trend changes at the same time!!!!!
When we apply the US long bond interest rates in red to the Gold price in yellow there is also a basic long term correlation. Rising rates indicate a rising gold price but falling rates are not good for gold. If my analysis of the US long bond rate data is anywhere near correct then we can expect rising US interest rates leading to a falling Dow and rising gold price.
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Dr. Clive Roffey
3 May 2005
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