We summarized our previous essay
from October 31, 2012 by stating that the correction in metals may not be over yet. It looked like it’s over in case of the mining stocks, at least in terms of price.
This has been quite a week. Not only has Hurricane Sandy shown us how vulnerable we are to the large and indifferent forces of nature, but we also saw how markets can plunge even though the fundamental situation did not deteriorate. In the short run markets, don’t act on fundamentals – they move based on investors’ emotions and short-term price swings will always be present. Just as we can’t eliminate weather’s unpredictability, we can’t control what will happen on the market in the short run, even though we are convinced of the existence of the gold bull market.
There are some things that we can do about it, though – in both cases, we can prepare to some extent. In the case of the stock market and the precious metals market, we can use charts and technical analysis to estimate what may be waiting just around the corner. In the following essay, we will do just that. We will focus on stocks, crude oil, and gold markets.
Let’s start with the S&P 500 Index
(INDEXSP:.INX). (Charts courtesy of http://stockcharts.com
Click to enlarge
We did see a pullback in stock prices (SPX) this week, but the rising red support line has not yet been reached. Therefore, it seems that further weakness could be seen before stocks form their bottom. A day or so of declines followed by a strong rally just before Election Day seems to be a likely scenario. There’s also the possibility of a rally without an additional move lower.
Let us now move on to crude oil, as this commodity is quite useful in analyzing the precious metals market and also seems susceptible to the influence of the election.
This week, we have seen a further deterioration in WTI crude oil prices. At this time, it seems that the medium-term trend for crude oil prices is down. If the neck level in the head-and-shoulders pattern is broken, then the downside target level would be close to $60. This is considerably lower (about 30%) than today’s crude oil price and would not necessary bring gold and silver down as significantly. Such a case was seen in mid-2011. All-in-all, however, the short-term implications here are bearish for the precious metals. Let us have a look at the intermarket correlations to see what the above developments could mean for precious metals.
The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. We continue to see little correlation between the USD Index and gold and the rest of the precious metals. This can be attributed to what has happened within the past month where metal prices declined despite the lack of a rally in the USD Index. This is a bearish factor for gold, silver, and the mining stocks.
The general stock market is positively correlated with the precious metals. This has bullish implications in these days just before the US elections. However, since gold price increases are not really what the powers that be prefer to see right now (since they are implications of inflation), we could see some deviation from the normal correlations. The point is that significant coefficients should not be considered as useful as they normally are. In short, the overall implications of this table are bearish to neutral for the precious metals sector.
Click to enlarge
Analysis of the short-term GLD ETF chart once again gives us bearish implications based on price trends and price/volume action. Declines have been accompanied by relatively high volume and no breakout has been seen. Wednesday gold and silver moved higher, but they didn't move above their short-term declining resistance lines (see above chart).
For the yellow metal, the line was touched but not broken and gold prices declined on Thursday. The question is: When will the downside target levels be reached? Based on the above chart, it seemed that the bottom was likely about a week or so away; however, based on today’s price decline, it seems that the decline may already be over today.
Summing up, the short and medium term picture for crude oil is bearish, which may translate into lower precious metals prices in the near future. The general stock market is mixed for the short term and the final support line for stocks has not yet been reached. With Election Day looming, however, some strength is possible for stocks in the coming days. This will probably have a positive impact on the precious metals. Based on Friday’s decline, it seems that the bottom in the precious metals sector might have just been reached.
No positions in stocks mentioned.
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