Chart Symmetry

DeBeers; US 30 year Treasury Bond; Dow Volume

April 26, 1999

Chart Symmetry is designed around the observation that prices tend to change direction along certain preferred gradients. New readers are advised to read the first article in this series to discover how Chart Symmetry works. The link to this article is :
http://www.gold-eagle.com/south_africa/regional_analysts/joubert020699.html

The prices shown for the lines are the values of the lines at the next time interval after the chart close. It is not a prediction that the price will suddenly move to reach that line overnight, but provides the reader a measure of the move that could take place if the price pattern does develop in the direction of that trend line. The steeper the line, the greater will be the change in the line value over time.

The key point to remember throughout is that the gradients of all secondary lines were derived from the gradient of the master line. The scope for the analyst to 'do his own thing' and develop a pre-conceived pattern is therefore quite limited. The patterns that are shown in the analyses are inherent in the charts, but these are not the only patterns that can be derived.

De Beers in US currency – calculated from JSE close. Daily close. (Last = $23.00)

The chart shows the same bear channel used in recent reports. Lines X and Y, with a gradient that is the direct inverse of that of line M, have been added. The break above line A, followed by a return to A and a subsequent rebound, can now proceed in either of two ways that are well recognized in Chart Symmetry. The two Scenarios describe the possible developments.

Scenario 1: The price reverses direction again to break back below new support at line A. The formation above A will be a bifurcated top – typically a major reversal pattern. A new and steep bear trend begins with the break below A.

Scenario 2:. The rising trend continues after the goodbye kiss on line A. It begins a second stage in the bull market that should reach as far as line X.

Preference: From just before Christmas last year, DeBeers has gained 93% in US dollar terms. This is an excellent performance, partly fueled by DeBeers' holdings in other Anglo American companies. With Anglo American due to list in London, prices of shares of subsidiaries that will be absorbed into the parent company to simplify the structure have skyrocketed. While DeBeers is not included, it has large investments in Anglo American itself and other Anglo companies and benefits from the price increases.

However, as Ray and Zulugold have mentioned on the Gold-Eagle Forum, DeBeers has historically been the pathfinder in any new bull market in gold shares. Where DeBeers led, the gold mines tend to follow in due course.

Additional analyses not shown here indicate resistance at about $22 as quite significant. Yet volume analysis does not yet reveal any substantial profit taking at the moment. Scenario 2 is therefore preferred, with consolidation continuing above support at line A as a worse case development.

US 30-year Treasury bond. Weekly close. (Last = 5.598%)

On its weekly chart, the same as that shown here some weeks ago, the yield on the US 30-year T-bond is still testing important market support at line B. The probability that the yield will break through this market support to rise towards the next level of support at line A (6.19%) is discussed more fully after the next chart below.

Scenario 1: The yield remains below market support at line B and even rebounds lower to turn more bullish.

Scenario 2: A break through market support at line B is followed by a steep rise in the yield, first to the psychological 6.00% and then to market support at line A.

Preference: Discussed after the following chart.

Price of US 30-year Treasury bond expressed in Yen. Weekly close. (Last = 21.3)

It is well-known that Japan has been a large buyer of US debt for quite some time. When the weekly chart of the price of the US 30-year T-bond is expressed as in index in Yen (calculated in simplified form as the Yen-US dollar rate divided by the yield on the T-bond) the principles of Chart Symmetry reveal that the link between Japanese purchases and the yield on the US 30-year might be tighter than expected.

This is the first analysis shown here that has two different master lines. The first line, M, is the base line of the whole formation. Line I is the inverse of M, to form a major symmetrical megaphone, I-M. The megaphone contains a number of very volatile moves, typical of this kind of chart pattern. The break out of the megaphone was also volatile and sustained, which is also typical.

The 1995-1998 bull market in the US 30-year T-bond showed an overall gain of 150%, from the Japanese perspective.

The whole rising trend and subsequent decline also fits into a steeply rising megaphone, F1-M1. Line M1 is the second master line and is the support line of the 1995-97 starting phase of the steep bull market. F1 is a steeper derivative of M1.

Why two different master lines are needed for the two different phases of the chart, is not known. It can be speculated that the nature of the marker changed completely after 1995. However, the decline in the yen price of the 30-year T-bond ended when it reached support at line I in the first week of January this year. Since then it has on three more occasions rebounded quite accurately off that support line, only to return.

A break back into megaphone I-M would imply either a firmer Yen, a sharp increase in the yield of the 30-year T-bond, or a combination of the two. If such a move were to happen, the Yen price of the 30-year T-bond is likely to fall steeply after breaking below support at line I. This event may well prompt foreign holders who are still in the market, despite a 23% fall in price from the peak, to sell out and repatriate their funds.

Of course, with support at line I holding for more than 4 months – and line M1 now also coming in play – it may turn out that support at line I is rock solid and that a weaker yen and a stronger bond market will soon carry the Yen price away from the danger zone near the top of megaphone I-M.

Scenario 1: The Yen price of the US 30-year T-bond breaks lower below support at line I and falls steeply on a combination of a weaker US dollar and a weaker bond market. This would imply a break above market support at line B for the yield on the 30-year T-bond in the preceding analysis.

Scenario 2: The Yen price of the US 30-year T-bond extends the current rebound off support at I to begin a new bull market. This would be the result of a weaker Yen and a stronger US bond market, with the yield on the US 30-year T-bond therefore holding below market support at line B, in the preceding analysis.

Preference: Markets appear finely poised and this chart could develop either way. The fact that it is not clear what will happen here is outweighed by the importance for investors and markets of a break lower below support at line I.

If the Yen-Dollar rate divided by the yield on the US 30-year T-bond should fall below 21.2 on a Friday close, the break below support at line I will be on and the bear market in US bonds from a Japanese perspective – and in US dollar terms as well – will speed up again. The US dollar will also decline in value.

Such an event is likely to coincide with a Friday close of the yield itself above market support at 5.605%, as shown in the preceding analysis, something which would probably trigger a bear trend on Wall Street, if such had not already started..

Dow Jones with Volume. (Last = 10690)

The chart below uses the dPdV® indicator. The model on which the indicator is based and how the indicator is generated are explained in an article to be found at this link:
http://www.gold-eagle.com/south_africa/regional_analysts/joubert042099.html

The chart below is an updated and more detailed version of the second example showed in that article.

The upper chart shows the Dow Jones Industrial Index in its post-October 1998 bull channel, near to resistance at line B. Of greater importance is the dPdV® chart where the numbers indicate significant developments. As before, the blue lines are a bar chart of the MACD of turnover, with the pink lines a bar chart of the MACD of the Dow Jones index.

  1. The steeply negative price MACD shows a falling index (August/September 1998) and sharply rising turnover. Buyers were stepping into the market to pick up bargains while the yen-carry players were selling as quickly as they could to prevent being caught by the stronger Yen.
     
  2. At the end of the sideways move after the initial fall, rising turnover (blue MACD) shows new buyers coming into the market. As the index rises, sellers withdraw and the Dow continues higher on reduced turnover.
     
  3. The Dow rose to a major high on declining turnover (volume MACD below the base line). The Dow tops out at resistance at line A and declines gradually with no sharp increase in turnover to indicate a major sell-off. This behaviour is not bearish, but rather indicates a plateau with the potential to resume the rising trend.
     
  4. The decline ends with a new increase in turnover as buyer support enters the market.
     
  5. A new high in the Dow ends with a flurry of selling, evident from the strong increase in turnover and the subsequent decline in the Index.
     
  6. The decline in the Index is halted when buyers remain in the market at the lower price levels, thus to introduce stability and initiate a sideways trend.
     
  7. The new increase in the price takes off without being led by a significant increase in turnover. It would appear that this reflects the charge upwards of a narrow market based on a few Index stocks, rather than a broad market movement. The market as a whole begins to react later, as shown by a rise in turnover (volume MACD moving positive during the steep rise in the Dow) but these events are not substantial and do not last.
     
  8. The most recent rise in the Dow to new highs started with a slight increase in turnover – buyers entering the market again – which soon fell away as the Index took off. Then turnover spiked to very high levels, the steepest increase in volume seen during 9 months of chart history, to enter a period that could be decisive for the future of Wall Street..
     

Scenario 1: The Dow keeps on rising and turnover drops off steeply as sellers realize it is still to soon to get out of the bull market. 11000 points and more is within reach.

Scenario 2: Turnover remains high – near or even above 1 billion shares/day – and eventually prices top out and begin to decline as buyers have their orders filled and move to the sidelines, thus reducing demand. As even favoured stocks increasingly fail to reach new highs, more sellers flock onto the market and become desperate enough to sell to any bid in sight. The market starts to fall quite steeply.

Preference: We are entering the second week of the new dPdV® pattern where steeply rising price and turnover could develop into a signal of a major top. The averages used for the MACD indicators are about 8 and 15 days, which means that turnover above say 850 million shares/day should still keep the MACD of turnover quite positive. However, soon turnover will have to rise to new highs – on average – to prevent the turnover MACD from beginning to fall. For a top to be indicated, this should not happen unless the Dow itself has topped out and is beginning to fall.

It would therefore appear that the week ahead could be quite critical for Wall Street. If turnover on Monday and Tuesday falls off while the Dow keeps on rising, Scenario 1 seems likely to develop.

However, with the Dow down slightly on Friday, a continuation of this trend on Monday and Tuesday while turnover remains quite high would point to Scenario 2.

Really too close to call, but my preference lies with Scenario 2. Bearish by this coming Friday (April 30th).

Previous charts:

There has been little change on the charts of POG or of the gold shares. These will be analyzed again when new moves warrant this. Previous analyses are in the Gold-Eagle archives and are accessible through the Index of Research/Top Analysts on the G-E home page.

The gold price has broken from the bear channel and now has support for the Friday PM fix at $280. The key resistance level for the Friday PM fix is at $295.40.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.

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