Long Term Chart Symmetry - US T-Bonds and Gold

October 18, 2004

Over the years, various analyses based on Chart Symmetry have been published here and elsewhere on the internet. Recently the focus 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.

Since the last analyses a few months ago, the situation has developed to where it is now again time to bring these charts to wider attention.

Briefly, for readers who have not read about Chart Symmetry - it 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..

The US 10-year Treasury bond

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 were generated from the single point of origin on the chart 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 transformed into a lower gradient. It is obvious that 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 X-Y is the direct inverse of line F, while channel A-B is the direct inverse of the master gradient, M. Note that line Y has as its origin what was by the mid-70's the most prominent high on the chart of the yield. It then picks up the much more recent lows with quite good accuracy.

The most surprising aspect of this analysis is the good fit between line A - the direct inverse of the master line and generated from the all time high in 1981 - and recent highs in the yield. Twenty years and more later, 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.

Many readers would by now have seen that A-Y is a very large pennant. The pennant is a continuation pattern, just like the triangle. This implies that a break above line A would begin a bear market in the yield that should reach above the previous high in 1981. A first level of market support for the yield would be along line X, currently with a value of 6.545% and decreasing over time. If there happens to be a break above line X, then line F becomes the target at 11.34% 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 the previous chart. Line F is again the second shallower derivative of M, with X-Y the inverse of line F but, in this instance, A-B is the shallower inverse of line M and not the direct inverse, as was the case with the 10-year bond.

Again, A-I is a large pennant with - as for the 10-year - the yield having just completed leg 5 of the pattern and thus ready for the break higher into the new bear market.

One analysis like this 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 - the centre 'notch' of the pattern is often situated on a strong trend line. For that reason, the master line was defined using that point and also the high in 1987.

Line I is the inverse of the master gradient - giving good confirmation of the gradient - and channel A-B-C is the steeper derivative of the master gradient.

M-I is a symmetrical triangle. If one disregards the 'temporary' break above M - which has been found to be valid for 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-C 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.

The resistance at line M is at $423 for this month (October 2004). If the break takes place while still on leg 4, the resulting move higher will be steep and furious - as we have found tends to happen when a break from a triangle takes place prematurely, before leg 5 has properly started; as happened to the gold price after 1996.

With the gold price now testing $420 and with two weeks to go to the end of the month, there is some chance of the break taking place before the end of October. However, that would call for some buying pressure in this period leading up to the US election. Perhaps it only will be at the end of November that the break takes place - but then still on leg 4 and therefore still due to be quite explosive.

Conclusion
The long term view for the US Treasury long bonds are very negative, once the pennants are broken. Obviously when this will happen is not easy to predict, but technically it is due to happen at some time in the not too distant future, relative to monthly charts.

The gold price is facing significant resistance at $423 for the end of October.

A break higher while on leg 4 of the large triangle should be steep and sustained. We just have to be a little patient.

Kind regards to all and happy trading.

Gold is the official state mineral of Alaska.

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