EQUITIES, GOLD & SILVER
Aksel Kibar
30 January 2009
Charles Dow developed the Dow Theory from his analysis of market price action in the late 19th century. In 1932, Robert Rhea further refined the analysis of Dow and Hamilton in The Dow Theory. The Dow Theory's basic tenets are as follows: 1) The market has three movements: Short, Intermediate & Long term. 2) Market trends have three phases: accumulation, acceleration and distribution. 3) The stock market discounts all news. 4) Stock market averages must confirm each other. 5) Trends are confirmed by volume. 6) Trends exist until definitive signals prove that they have ended.
Hamilton and Dow stressed that for a primary trend (buy or sell) signal to be valid, both the industrial average and the transportation average must confirm each other. If one average records a new high or new low, then the other must soon follow for a Dow Theory signal to be considered valid. In June 2008, Dow Jones Industrial Average failed to confirm the new high set by the Dow Jones Transportation Average. This served as a warning sign. After the sharp sell-off in the second half of 2008, in January 2009, Dow Jones Transportation Average made a new low. However, this was not confirmed by the Dow Jones Industrial Average. Non confirmations are usually regarded as first warning signals of a trend change. Trends are assumed to be in force until proved otherwise. A primary trend change will be confirmed if the Dow Jones Industrial Average breaks above 9,500 and Dow Jones Transportation Average breaks above 3,650. The non confirmations put the two charts on our watch list for the following months.
SILVER
The chart above analyzes the Silver prices between 2007 and 2009. On the chart we can see the strong rally that pushed prices towards 21 levels in the first quarter of 2008 and the sharp correction that reached 8.5 levels in only 7 months after the peak. Even though the two price actions were sharp and swift, there were clear set ups before these moves occurred. Before the rally took place in the first quarter of 2008, the prices consolidated in a downward sloping range in the first half of 2007. The prices broke out of the range in September 2007 at 12.5 with a dual moving average cross over signal. The breakout and the moving average signal were bullish for the Silver prices. Before the sharp drop in Silver prices in the second half of 2008, prices consolidated in a flat range between March 2008 and July 2008. The prices broke down the lower boundary of the range in July 2008 at 16.5 levels with a dual moving average cross over signal. The breakdown and the moving average signal were bearish for the Silver prices. After finding support at 8.5 levels in December 2008, Silver is trying to form another trending period. Last week the prices broke out of a consolidation range between 10.20 and 11.70. During this week Silver pulled back to the broken range at 11.70 and continued higher. The moving averages are very close to generate a buy signal. The short/intermediate term trend is up. We are looking forward seeing strength in the price of the precious metal in the following weeks.
GOLD
The chart above shows the clear uptrend in Gold prices between 2000 and 2009. The uptrend is continuing in a clear parallel trend channel. Gold prices are in an uptrend in the long term. In the intermediate term, the prices are in a choppy corrective period. The correction that started in March 2008 from 1,030 levels found support at 680 levels which is the lower boundary of the long term parallel trend channel. The rebound from these levels pushed the Gold prices to the intermediate term trend resistance at 880 levels. This week we saw Gold prices pushing above the intermediate term resistance at 880. The 20 week - 50 week dual moving average is giving a bullish sign with the crossover. The last resistance at 920-930 range will be very important. A break above these levels will push prices higher to four digit numbers.
Aksel Kibar
Assistant Vice President/Portfolio Management
Abu Dhabi Investment Company
www.adic.ae
Disclaimer: Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. Any and all ideas, opinions, forecasts, market analysis or market data, expressed or implied herein, are for informational purposes only and should not be construed as trading recommendations to invest, trade, buy or sell securities and or speculate in any specific futures contract, option or any other market. Any investments, trades, and or speculations made in light of the ideas, opinions, and or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The market data contained herein is believed to be reliable, but has not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such is subject to change without notice. In no event will ADIC or any of its employees be liable for any information contained herein. Data Source: Reuters, Investopedia.
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