Long Term Chart Symmetry 4 US T-Bonds and Gold - August 2005

August 13, 2005

It is six months since the last in the series of long term reports on the US Bond market, the gold price and US dollar-Yen, using the principles of Chart Symmetry.

The analyses of monthly yields previously showed the US Bond market was approaching key values where major breaks for the US 10 and 30 year Treasury securities through long term support trend lines had become probable, if not inevitable; thereby opening up the way for yields to rise to much higher.

In these reports it was also evident the gold price was hesitating around a major historical trend line which, once left behind as the chart would suggest, will mark a watershed in the long term gold bull market, with $560 as a key target. Finally, long term charts warn of a much weaker dollar than what it is at the moment, despite the decline in its value that has already taken place and discounting the rally of the past 8 months.

The Appendix has an abbreviated explanation of the principles of Chart Symmetry for readers who are not familiar with the basic methodology.

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 much later picks up the more recent lows in the yield with quite good accuracy.

In February this year the yield rose above line X to effect a break through a 25 year trend line - clearly something quite significant and promising of higher yields in future. March saw the yield moving to 4.48% with the balue of line X at that time at 2.24%, for a most definite break.

During April the yield dipped to 2,20%, right on top of the line. A return to a penetrated line - a 'goodbye kiss' - is a noted feature of price behaviour and the expectation was that the yield will reverse into a higher trend. Yet during May and June the yield declined even further, to 3.91% at the end of June and well below line X, then at 2.12%.

False breaks are not uncommon in Chart Symmetry, but to get the first false break after 25 years was a bit of a surprise. The sustained bull market in bonds and the rally that took the yield lower also surprised Alan Greenspan, who termed the behaviour a 'conundrum'.

Now, at the end of July the yield has again broken above line X - and thus above pennant XB. However, on recent behaviour one has to wonder whether there will be another rally to take the yield back below line X again.

Markets are known for unpredictable behaviour and a second false break, followed by a new surge in the bond market cannot be excluded. Yet confidence in the results of a Chart Symmetry analysis tempts one to now anticipate a sustained rise in the yield.

Channel A-B has held so well at the lower boundary that it seems more than likely that in due course we will see the yield on the 10 year Treasury note testing market support at the upper boundary of channel A-B. Line A currently has a value of 6.395% and by the end of 2006 the value is down to 6.18%. A yield of in excess of 6% now appears to be within reach for the 10 year note.

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. Lines F2 and F3 are second and third shallower Fibonacci derivatives of the gradient of line M, with A-B-C as the first shallower derivative of M.

Here we have F3-F2 as a large wedge formation with - as for the 10-year - the yield now on leg 9 of the pattern! This is much more than the usual 5 legs of a narrowing formation. A wedge formation typically develops towards the end of a major bull or bear market and then acts as a reversal pattern in a large majority of such cases.

A-F3 is a large pennant and it too should in principle break to the upside, into a bond bear market. The two patterns therefore reflect the same expectation for US long bonds.

The Gold Price

A different master line is used this time, but the analysis remains the same with only very small changes in the values of the trend lines - as comparison with the previous analysis will show. The master line, M, is now the overall support line of the gold bull market of the past 32 years. Lines A and B are parallel to M; in typical CS fashion, line B is exactly mid-way between A and M, so that it is the centre line of channel A-M.

Line F is the first shallower derivative of line M and shows a good fit to the next low in the gold price - acting as support during the extended sideways move.

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 that point is used as the origin for line I. Line I is the inverse of line F and thus also a shallower derivative of line M. Line I corresponds to the master line employed in previous analyses, when the indicated origin of I was used as one anchor and the top of the 1987 bull market as the second anchor of the master line.

F-I is a symmetrical triangle. If one disregards the 'temporary' break above line I into a double top - which is valid in the case of bifurcated breaks - the gold price was on leg 5 of the triangle, rising above $400, when it suddenly reversed direction in February 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, as we know.

The decline subsequently turned pattern M-I into a very large triangle of which leg 4 has recently started, then failed to extend towards line M. The subsequent break above line I, while still on leg 4, is in principle very bullish for gold. Premature breaks from triangles - that is, before leg 5 has been completed - tend to be steep and sustained. Here, though, we find that the gold price could not get away from line I following the break higher in November 2004. The monthly close even dipped back below the in May this year, as if trying to get back onto track for leg 4.

So far, support along line I is holding well. This line golds the key for what happens next.

Dollar-Yen

Master line M is as before, its definition clearly evident. Lines A and B are parallel to M and define the initial dollar bear channel that held with only one false break - at the time of the Plaza Accord - from 1970 through to 1995. Line F is a shallower derivative of M, so that M-F is a megaphone formation. Line F4 the fourth shallower derivative of the gradient of line M, with line I as the inverse of F4; F4-I is thus a symmetrical triangle. Line H is horizontal, defining key near term market support for the dollar, just below the symmetrical triangle.

The monthly chart of the Dollar-Yen rate shows how the Japanese currency appreciated against the dollar since 1972, when currencies 'floated' 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 which 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 1995 break from channel M-A continued into the development of triangle F4-I.

In about 85% of cases where triangles develop, the price completes the 5 legs needed to define the triangle fully before breaking out. Here we have the dollar in the rising leg 4 of the triangle and thus statistically destined to reach line F4 again, where the downward leg 5 is due to begin. In a minority of cases the price breaks from the triangle before leg 4 had been completed; this typically results in a steep and sustained trend. Dollar support at line I - or line H - is therefore critical for the near term well-being of the US currency.

Conclusions

The long term view for the US Treasury long bonds is very negative. The US 10-year has again breached the pattern to the upside; it remains to be seen if this will again be a false break, perhaps as evidence of intervention in this market. The 30-year has some distance to go to break higher, with the 25 year market support line situated at 4.765% for the end of August. There is also a second level of market support at 4.945%.

The situation only changes slowly on charts of the monthly close. However the medium to longer term outlook for US bonds remains very negative if one accepts that the same chart formations that prove useful on daily and hourly charts also operate on long term monthly charts. The good fit of the derived lines, where the gradient is pre-determined by that of the master line, is evidence in favour of such a premise.

The gold price has broken through significant resistance, now situated at $421, and is holding above that level, with the one exception of May 2005. Yet it has had little success in capitalising on the break by extending the trend. The $437 close at the end of June was a fourth attempt to extend the bull trend above the old $421 resistance. The weakness in July ($429) looks as if the current attempt could be as unsuccessful as the previous three attempts. Note that the run-up to almost $450 during the first half of August still has more than 2 weeks to go to the end of the month - much can happen still. On the other hand, this move might just be what we have been waiting for for such a long time.

Against the Yen the dollar is developing a symmetrical triangle; its consolidating pattern in the long term bear market. It has just started on leg 4, with a potential target at about ¥128. If, before reaching that level, the dollar should weaken to close a month well below key market support at ¥103, the outlook for the US currency would turn very bearish.

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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.

 

daan joubert

August 2005

daanj@kingsley.co.za

Gold is the official state mineral of Alaska.

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