If Gold Is Topping, What Are The Implications?

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Includes: GLD, OIL, SPY, UUP
by: Marc Chandler

Summary

Gold peaked a month ago and looks to be breaking down.

The Dollar Index often moves in the opposite direction of gold, so a breakdown in gold may be consistent with a bottom in DXY.

A top in gold may also be consistent with a setback in oil.

This Great Graphic, created on Bloomberg shows the price of gold over the last six months. The price peaked a month ago near $1285. It seems a distribution top is being formed.

Specifically, it looks like a potential head and shoulders top. The left shoulder was formed by the spike on February 11, which also marked the bottom of many equity markets. The head was formed in the first half of March. The right shoulder was put set earlier this week.

To be sure, the neckline has not been penetrated. It comes in near $1213 today. It rises slowly and is near $1216 in a week's time. The important point of these technical patterns is the measuring objective. In the head and shoulders pattern, one can simply flip the pattern over to get the minimum objective. It is near $1140.

Of course, trading is so serious and difficult, one should not rely only on a single technical indicator. The $1140 area corresponds to a 61.8% retracement of the rally from the early December low near $1146.50. If today's loss are sustained, gold will close below the 50-day moving average for the first time since the very start of the year.

The RSI has been trending lower since mid-February, which means the rally to new highs in March, was not confirmed. A broadly similar pattern is found in MACDs, which, after trending lower since mid-February, did cross higher earlier this month but is turning back down now.

What? You don't trade gold? That's ok. There are implications a fall in gold prices for other markets. For example, gold and the Dollar Index tend to move in opposite directions. Not all the time, but over the past 100 sessions, the level of the two are -0.77 inversely correlated. Over the past 50 sessions, the inverse correlation has practically disappeared (-0.10) Since March of last year, this is about the highest correlation has been. On a percentage change basis, the inverse correlation of the past 60-days is about -0.42. It has been broadly stable since the middle of last year.

Gold and the S&P 500 are extremely inversely correlated now. On a 60-day rolling basis, the correlation of the percentage change of the two is near -0.40. This is the most since 2011. Oil and gold are rarely inversely related, but this is one of those times. The inverse correlation on a percentage change basis is low (~ -0.11), but this is the most since 2011. Simply running the correlation on the level of oil and the level of gold finds a positive 0.52 correlation over the past 50 sessions.

Of course, the strongest implication of the potential head and shoulders top in the gold is bearish gold. But, the broad implication is that a drop in gold may be consistent with my caution about buy the rumor sell the fact (or disappointment) with oil. It is also consistent with my idea that the dollar may be bottoming.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.