Gold and Silver - Following Stock Indices or Moving Against Them?
This essay is based on the Premium Update posted on August 6th, 2010
In one of our previous essays entitled The Strength of Reaction and Precious Implications we have analyzed the general stock market and the way it could influence gold, silver, and mining stocks. We have summarized that we are likely to see a short-term bounce to the upside. Now - with gold over $40 higher - we would like to provide you with a follow-up of that particular essay.
In the following part of the article we will also provide you with our thoughts related to one of the questions that we've received from our Subscribers - how is gold likely to perform in deflationary environment.
Let's begin with the long-term SPY ETF chart (charts courtesy of http://stockcharts.com) that we often use as a proxy for the general stock market.
The long-term SPY ETF chart this week is not significantly different from what we presented in last week’s Premium Update. We continue to monitor signs confirming that the bearish head-and-shoulders pattern has indeed been invalidated. This week’s signs do not support any continuation of this pattern, but we are still awaiting a decisive move above the $113 level to put away any thoughts about this pattern. The coming week will likely provide much more insight as to short-term market direction and a final decision on the status of the bearish head-and-shoulders pattern.
This week’s short-term chart clearly shows a period of sideways movement with low volume in recent days (since the beginning of August). This short consolidation period has, however, created a small flag formation in our chart. The movement from the $112 level to $113 is the specific area where this formation is seen. The possibility exists in that the next move will again be in the range of three dollars and could take the SPY from $113 to $116.
This possible local top at the $116 level will likely be followed by a correction back to $112 or $113. Verification of this as a support level would then be tested. Note, however, that this is pure speculation and we are not advising any move be made to profit at this time - gold, silver and mining stocks provide better opportunity for this.
Precious metals are clearly outperforming stocks at present. Any show of strength by the general stock market could result in further strength for the precious metals sector. Furthermore, percentage gains for gold, silver and mining stocks may very well be greater than those in the general stock market. This is all dependent, of course, on the direction taken by the main stock indices in the coming days.
The XBD (Broker Dealer) Index checks the pulse of the financial sector. This week we see confirmation of stocks’ present critical level. The multi-month support/resistance level is an obvious factor and will play a strong role in days to come. Perhaps stock values will increase dramatically for the next weeks or even months. It is possible however; that we will first see a downswing in the general stock market and this will obviously have great impact on gold, silver and mining stocks. Constant monitoring is required in these uncertain times. Sunshine Profits is ready for the task. For more details, let's take a look at our precious metals correlation matrix.
This week’s correlation matrix shows only a small amount of critical information as the 10-day column to a considerable extent contradicts the 30-day one. Should this persist for several more days (meaning gold, silver and mining stocks rising along with the general stock market and against the USD Index, we could see the precious metals market top along with dollar's bottom.
Summing up, there has been a complete turnaround regarding the correlation recently between the gold, silver and mining stocks and the general stock market / USD Index. Further gains seem to be likely if the general stock market trends upward. The difficult call at this time is to project metals market trends in a period of general stock market decline. It is just too cloudy a situation to comment on at this time but, rest assured, Sunshine Profits will monitor this closely as the situation develops over the next week. Subscribers will be kept informed with a Market Alert when warranted. Our best guess here is that the way that the precious metals will respond to either breakout or breakdown on the general stock market is likely to mark the next big move in the sector.
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Thank you for reading. Have a great and profitable week!
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All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.
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Disclosure: no positions
Disclosure: no positions