Saturday, July 7, 2012

Gold's Bottom, US Dollar's Top - Late August, Maybe?

This article will begin with a close up look at the recent rallies off the May 16th low of both gold futures (GC) and Market Vectors Gold Miner ETF (GDX), proceed with some fascinating data regarding the time ratio of all C-wave tops with respect to gold's repetitive ABCD pattern, and conclude with 5 charts focused on the US Dollar Index (DX) from 2008 and forward. The sum of this discourse will likely leave the reader with the notion that gold has probably not yet bottomed, the US Dollar has probably not yet topped and the reader will gain an awareness of the time frame that may be necessary before these metrics are behind us, rather than before us. 

Also, this article will demonstrate a True Strength Index (TSI) indicator technique that I have used successfully for a long long time, but don't think I have ever written about. This technique will show you how you can use a specific TSI trend line to project the timeline for a long rally's conclusion (peak) far in advance of the actual occurrence.

So let's get started with this daily chart of the gold futures contract (GC) and make a few quick observations.

Click on any chart to ENLARGE

Here we see that the May 16th low of 1526.7 has been followed by one rally that eventually retraced itself by 78.6%, and now we are in a second rally that on its 6th day has managed to retrace itself by 61.8% then bounce to closer to a 50% retracement by the close. The TSI has given timely BUY and SELL signals, and at present is reading just above ZERO and no new signals are in place.

Next is the daily chart - GDX.

GDX tells much the same story as gold. First rally off the May 16th low makes a slightly stronger showing with a 61.8% retracement vs. gold's 78.6%. The second rally has, in agreement with gold, now made a 61.8% retracement and then bounced up some at the close last Friday. The TSI has been spotting the BUY and SELL locations well with the trend line break technique and currently reads just below ZERO at -2. This reading is technically a SELL signal using the ZERO crossover technique of identifying BUY and SELL signals.

At this point, things don't look real bad, but they are not great either. 

Both GC and GDX have now made a succession of 3 lower highs, gold has not closed a single day above its descending 200 dma in 47 trading sessions, GDX has been below its descending 200 dma for 90 trading sessions and has not been able to close above the descending lower megaphone trend line for more than a day or two before being pushed back below. 

So this brings us to my research on the time ratio of C-wave tops with respect to the entire ABCD pattern in which they are found. If you are wondering why this item of trivia was of interest for me to discover, the question is this: is there a common relationship between the C-wave top and the amount of time, a ratio of the entire ABCD pattern, that the D-wave needs to conclude its corrective work? In other words, are all D-waves similar in their time ratio with respect to the ABC-waves which precede it?

To arrive at the answer, I used a weekly chart of GC and counted and counted and counted. If I miscounted something by a week it was because my eyes got blurry and I really just wanted to just know the general answer to my question and not try to earn a Ph.D. in counting. Three college degrees is more than enough for me, thank you.

Here is what I found out:

June 2002
C-wave topped on week 24
D-wave bottomed on week 32
C-wave topped at 75% of this ABCD

February 2003
C-wave topped on week 26
D-wave bottomed on week 35
C-wave topped at 74.2% of this ABCD

The early 2004 C-wave had a double top.
The second top was 50 cents higher than the first top.
Here are both ways of looking at this:

January 2004
C-wave topped on week 39
D-wave bottomed on week 58
C-wave topped at 67.2% of this ABCD

March 2004 (2nd top)
C-wave topped on week 52
D-wave bottomed on week 58
C-wave topped at 89.5% of this ABCD

November 2004
C-wave topped on week 29
D-wave bottomed on week 39
C-wave topped at 74.4% of this ABCD

May 2006
C-wave topped on week 65
D-wave bottomed on week 70
C-wave topped at 92.9% of this ABCD

March 2008
C-wave topped on week 92
D-wave bottomed on week 123
C-wave topped at 74.8% of this ABCD

RECAP 2002 - 2008:
75.0%, 74.2%, 67.2%, (89.5%), 74.4%, 92.9% and 74.8%

Clearly, 2006 at 92.9% was an anomaly. The double top 2004 situation was also unusual because it was, well, as I mentioned, a double top (duh!). Otherwise, 75% sure looks like the 'typical' placement of a C-wave top within an entire ABCD pattern.

So with that perspective, let's look at the data for the current ABCD.

September 2011
C-wave topped on week 150
D-wave bottomed on week 166 (using December 1523.9 low)
C-wave topped at 90.0% of this ABCD

90.0% seems a bit too early to me, so let's see where we would be if next week provides the true D-wave bottom. Remember, to accomplish this gold would have to trade intra-day below 1523.9 sometime this upcoming week.

C-wave topped on week 150
D-wave bottoms on week 194 (next week)
C-wave topped at 77.3% of this ABCD

Hey, now we are getting close to that 75% time ratio that is more in line with gold's past ABCD patterns. 

And just where would we be if we use 75%, you ask? Well, just a short ways before the end of August, is the answer. The C-wave topped on week 150 and when/if we get to week 200 for a D-wave bottom, that makes the 75%.

This conjecture is just so much nonsense if there is no reason to believe that gold has not already bottomed. 

Can you think of any valid reasons to seriously entertain the notion that gold may very well have not bottomed?

Aside from all my bean counting and trying to offer some respectable rationalization, I can indeed. 

My notion has to do with a proven catalyst for gold's price behavior - in both the up and down directions - and that catalyst is the US Dollar Index (DX). In fact, the outcome of what I am about to show you is truly going to make all the difference regarding where gold goes from here.

So let's continue now with a daily chart of the DX from the 2008 time period to the present and get a feel for what this thing is capable of doing and figure out what it looks ready to do next.

The highlights I wish to bring to your attention include the magenta colored slightly descending trend line connecting past tops and cruising directly overhead at around 87.00, the possibility that the dollar has been in the consolidation phase for the past couple of months in what looks like a T1 continuation pattern with a price projection some 400+ basis points higher, and in the lower indicator panel we view the history of the buck's ability to rise above its 200 dma before being brought back to earth.

The takeaway here is that overhead resistance is at 87.00, a T1 pattern has made half its move, consolidated, and ready to finish the other half of its move towards a target of 86.50+, and the dollar, currently just 4% above its 200 dma is no where near overbought if it should decide to start rocketing higher. In fact, the completion of the T1 pattern would put the dollar right about at 10% above its 200 dma and combined with the overhead (magenta) trend line would likely send this rally to the showers if/when it gets there.

Here is a look at the dollar weekly chart also beginning with 2008, but this time with some TSI thoughts.

This is a view that is a little less cluttered and puts the magenta colored down trend line as well as the T1 pattern setup in perspective. Those reader with a sharp eye for how to use the TSI will note that currently we have the potential - with a very small basis point move of less than 10 - to make a higher high on price while obviously making a lower high on the TSI indicator. This is a negative divergence SELL signal. 

But I'll tell you this. Considering we could be talking about a fully fueled T1 pattern breakout to the upside, if the dollar has that plan in its head it will just run over the negative divergence SELL signal. This happens on extremely charged highly volatile rallies, as we see was the case in early 2010 (orange rectangle). The normal expectation is what followed this specimen in March 2010 (blue rectangle). Here, the negative divergence indeed caused price to pull back for 4 weeks. This in turn created what was needed to draw a trend line break BUY signal when price resumed its spirited rally.

Finally, let's take a closer look at what the dollar index did in 2008 and 2010 and how it is poised for further action in 2012.

Here is the daily 2008 dollar using a Fibonacci time ratio measurement. This stuff always amuses me because I am amazed at what I find. The first top is exactly 61.8% of the second top - how about that? And the TSI nails both tops with incredible accuracy.

Oh, here is that technique I promised to tell you about .... circled with green. The two low points that are surprisingly close together create the trendline that I think of as the 'master TSI trend line' for the entire rally. When the TSI finally crosses back down through this trend line, it is always game over. Another day I will devote an entire post to this subject with lots of examples and then you will more fully understand how to spot it in your own work.

Here is the 2010 chart. Again, the 61.8% peak that precedes the final exciting rally, and some other stuff. This time the TSI misses the intra-day rally high as it was late 3 days. Oh darn. 

Last chart - here is the current dollar action. We got a new trend line break BUY signal on this past Friday. There are a pair of underlying TSI trend lines that, when crossed, will spot the top. That does not appear to be likely any time soon. The Fibonacci time ratio came out differently on this example. I ended up using the January rally top as the 38.2%, the late February low as the 50%, and that left me with the 100% measurement landing on August 27, 2012.

In summary, gold has been below its 200 dma for so long that it is behaving as though it is still in a D-wave and not in the early daily cycles of a C-wave. Gold has not (yet) retraced at least 50% of its C-wave, as all other preceding D-waves. A price in the $1400 range would take care of that. And finally, the history of C-wave tops measuring near the 75% time marker of the ABCD pattern will not be paralleled until sometime in late August, at the soonest.

The US Dollar Index appears to have been consolidating a T1 pattern that projects it 400 or more basis points higher (which 'coincidentally' is where a major trend line awaits). Also, the dollar received a daily chart TSI trend line break BUY signal on Friday. And, the dollar index is not overbought in terms of its price relationship with its 200 dma, and though admittedly not terribly compelling, a case using the Fibonacci time ratio can be made for a late August top in the dollar. 

Will all of what I have written come to pass? Will any of it? 

Heck if I know. 

But you and I still have to make investing decisions and live with the consequences, either way. At the moment, I plan to sell anything that can be liquidated at close to break-even, and hold the rest - come hell or high water, as they say.

I wish you are great week and honestly hope I have this entire thing all wrong. I would much rather see my positions go up in value, than the opposite. Keep in touch, OK?



  1. John,

    As my ancestors may say, "I'm a little confused". Looking at the dollar spike in 2010 neither gold nor the shares overreacted to the spike you show. In fact one could argue there was a positive correlation between the dollar and gold. I know what happpened in 2008. But, in 2005 both the dollar and gold went up. Not saying you're wrong by any means but why are you so certain gold would get "thrashed" with a dollar spike? Love your work BTW.

  2. beautiful analysis John! I know lots of time and effort went into this, many thanks for sharing this with us!

  3. Gallo - your points are excellent. Gold was subdued by the dollar behavior in both 2005 and 2010 and certainly not thrashed. In fact, in 2005 there were intermittent 2-3 week long spells that they both went up together. Examining this in detail, it looked like a cat and a mouse trying to co-exist. Both had their eyes fixed on reaching a higher destination yet when one noticed the other following too closely, well that would not work because cats and mice are not 'supposed' to get along. So one would feign their intentions, drop back or just stay idle long enough to be out of sight from the other - then resume the pursuit of reaching their destination. In 2010 gold also had a few short bursts moving skyward with the dollar, but usually its direction was inverse and its price was capped at 1250 until the coast was good and clear 3 months *after* the dollar peaked.

    When I look at this relationship over the past two years it appears to have a consistently strong negative correlation. The dollar's 400+ basis point rise beginning near the of April dropped gold nearly $150 in just 3 weeks. Things can always change, of course, but not having a crystal to *know* the future I just try to think through what is known and take a course of action that seems *probable* until proven differently. Right now I think probability favors dollar up, gold and miners down.

    Thanks for both your question and your compliment.

  4. Thank you John for your quick response. I must differ with your analysis of the dollar/gold relationship. Although gold began its decline in December of 2009 seemingly when the dollar began its assent, one could argue gold's decline at that was merely fortuitous. By December of 2009 gold had already made both a large and steep advance. So a decline was expected. Futhermore, although the dollar continued to advance through June of 2010 and rather propitiously between May and June of that year, gold also similarly advanced and the same rapid pace. And when the dollar began to correct in June through August of that year look at what gold did: it likewise declined. This is just one example highlighting what I believe to be an overstated case: that gold almost always declines when the dollar advances. Much too simple of an analysis and in my mind that would be like someone looking east for a sunset.

    True, gold declined in the face of a rising dollar in 2008 but that's not what happen in 2005 when they rose together for an entire year. And I'm sure there are other examples. So, applying this analysis to the present situation, it would be shortsided (not a shot at you because you are anything but) in my estimation to simply suggest everything rides on the dollar when it comes to gold. What needs to change is not the dollar's direction (as it will rise most assuredly IMO) but a mindset. Gold must be looked upon as safehaven and not a risk asset. When that occurs, (I don't know if it's now or later in the year) out of the blue gold will rise along with its other "safehaven" brother: the dollar.

  5. Last point and then I'll stop. I think in the short term during the early phases of the sovereign defaults or at least the risk thereof people are more likely to run away from gold and move towards cash. As the defaults evolve which I think is much sooner rather than later, gold will again enjoy its risk off status along with the dollar. And when this mess heads to our shores gold will already be on an accelerated pace. But, it's anyone's guess as to when that may be. End of summer as you point out in your separate analysis to October at the lastest is my guess when we begin to take off in earnest.

    I just wonder whether the shares have already bottomed long before gold as it did in 2000 when the shares bottomed in November 2000 but gold didn't bottom unil February the next year with a marginal low made in April. I also note that from January 2001-June 2001 the dollar rose from 108 to 121 on the index while gold shares also rose significantly during this time. I know the economic climate is vastly different which is why I say gold's time may not be now but don't be surprised if all of sudden it moves in tandum with the dollar.

  6. Gallo, I always appreciate hearing well thought out ideas, such as yours, and particularly when they challenge my own ideas. Thank you for offering a follow up comment.

    There is an interesting TOS indicator named Correlation that I just looked at. I think it makes your point that in 2010 there was a stronger positive correlation between the dollar and gold than a negative or neutral correlation, at least until September when correlation flips to strongly negative. I was using a look back period of 5 weeks.

    When adjusted to use a look back period of 50 weeks (which will give us a better long term view of the data with a slight lag in precise timeliness), the indicator reveals that since 1996, some 186 months, the dollar and gold have had a relatively strong positive correlation (in either the up or down direction) for a total of 10 months (11/'05 - 5/'06 and 6/'10 - 10/'10). 5.4% of the past 186 months. 5% seems kinda insignificant when contrasted with the other 95%.

    And, beginning in March of this year the correlation has been continuously falling from a slightly positive correlation reading of +.21 to the current and strongly inverse reading of -.70.

    The facts that I am looking at suggest to me that the sun does indeed set in the direction I am looking (west, of course) and that the positive correlation between the dollar and gold is certainly possible and historically proven to happen for spurts of time, but this correlation occurs relatively infrequently. Gallo, I know we are just throwing out ideas and they are just that -ideas. Nothing personal and what matters most is that we share our ideas, think things through from another point of view and hopefully help each other become more successful because of the dialog. Thank you again.

  7. Gallo,

    You make some good points. However, we could look at the current inverse correlation between the dollar and gold in the same way traders look at a trend: It will continue until it doesn't. Until there is evidence that a trend is breaking down and changing direction, traders trade with the trend. Until there is evidence that the inverse correlation between the dollar and gold is breaking down, the prudent course of action is to either trade with the assumption that the correlation will continue, or stand aside until that correlation no longer holds.

    As you have said, you don't know when that will happen, whether it's now or later in the year.

  8. To John and Pima: I appreciate those well thought out points. John, I can't argue with those tools of yours. Thanks for going back and doing that bit of research. Very helpful. Pima, you're right: I have no clue when the relationship between gold and the dollar will be positive again (I assume it will). But, for now the weight of the evidence suggests the inversemrelationship still remains. Thanks for that. I was hoping for some good input that would help my thinking...and I got it.

  9. dude, great analysis but who cares? just get long gold/silver with 50% of your net worth and forget about it. put the rest in cash and passive income machines and wait for bargains to depoly the cash. wake up in a few yrs and you'll be much happier and richer than slugging out these details every day. like livermore says -be right and sit tight, it's a bull market you know!

  10. R Hanna - your opening question made me chuckle, and that has not happened for quite a long while. Thank you for making me laugh and for reminding all interested readers that their patience will pay off.

    On a certain level, and one that I think is most important in the longer term, I could not agree with you more. I have *a lot of fun* trying to think things through and see if I can do short term trades successfully, but the bigger picture is as you have said, in my opinion. It is a bull market, sit tight if you are under water with your mining positions assuming the companies you own are not or do not become impaired, and if you truly understand this *and have the patience to do it*, you will come out a winner.

    Thank you.

  11. Yes I agree you obviously put much effort into the above and it's brilliant so please don't think I'm undermining this in any way. I jus see a lot of this short term Forrest vs trees analysis floating arpund and am amazed how much mental effort is expended trying to harness randomness. It makes me believe that there are still people that are unsure of the nature of this bull market thus paradoxically confirming we are not anywhere close to a top. As long as there is mass skepticism the band will play on in metals. Once everyone 'knows' the market has nowhere to go but up, then it's time to get nervous. I wonder how many will stay to the end? I hope I'm one but who knows. Great work-cheers! :-)

  12. Hi!, Patrons Of TSI Trader Et Al:

    One of OUR Nation's billionaires,Jim Rogers, who believes exclusively in resource products & foreign currency holdings over the mid term told a TV anchor that they need not worry about paper based assets, because the time is coming when nobody will be using any Nation's paper money. How will we price gold then; except to use it exclusively as OUR currency? Paper prices for anything and everything won't matter at that point anymore will they? Gold should be in OUR possession when that time comes to use gold exclusively as OUR international currency unit of exclusive shouldn't we think?


    1. your chart is very intresting
      how can i follow ur daily chart for gold /currency?

  13. Nirmal - I write this blog for fun and don't make a daily chart of anything.
    I recently added a link in the upper left hand corner of the home page that
    I think will let you subscribe to receive notice via your email address that
    I have a new post. A little further down on the left side also is something
    you can click on to receive the actual posts in a reader. I really don't know
    how this works but there are hundreds of people who apparently do, so my stats
    show. Thanks for your question.

  14. This is a fabulous analysis which I will print an study in detail as well as research the TSI indicator. My timing has been terrible for the last 16 months of trading. On the positive vs. negative correlation issue you have to look at gold priced in more than one currency, i.e. the EURO in addition to the $. On the randomness comment there are 3 things that move prices.
    1. News/Events = shortest time frame
    2. Technical patterns = medium time frame
    3. Supply Demand Fundamentals = longest time frame
    Sometimes what appears to be random when looking at a chart is news or S/D changes. I would love to see news/events marked on top of your TSI charts. A recent example is this April gold was advancing and "The Bernanke" said basically no QE3 for now and maybe not ever. I would bet money that speech coincides with the day of the April top. Yes, I was long Gold at the time. I hate when that happens. Again, really enjoyed your analysis.

  15. Anon - thank you for taking the time to share your thoughts and I do also appreciate your compliment.

    Your ideas ring true to me. And your second sentence was, in light of your excellent understandings, kinda suggests another truth that has held me continuously captive studying the TSI, literally day and night, for the past 6 years. And that truth, if not obvious, is that one can have a great understanding of how the markets work generally but still find it very difficult to be rewarded.

    So, the TSI has fascinated me because it is 'independent' of a system that relies on news or fundamentals. Instead, it is purely a way of measuring the momentum of price direction. Instead of telling an investor 'why' something happens, it tells an investor 'what' happened and often suggests the direction of things for the foreseeable future. I usually find it helpful to combine the True Strength Index indicator with something else that is NOT also a momentum indicator. Money Flow, Measurements vs. Moving Averages, Volume and Volatility studies are what I am referring to. If I can help your further study of TSI in any way, please do not hesitate to contact me.

  16. trade e-mini futures on oil and gold -take your profits and then go buy tangible gold...big time! like the man has never gone so low as to be worth $0... but many fiat currencies have done that already!

  17. such a nonsense; I stopped reading as soon as I saw the trendlines drawn on the TSI in the first chart which gave 'timely buy and sell signals'. Yes in hindsight you can draw them to do that. Don't mind to notice that twice your trendline does not touch the TSI where it should and it would give you a money loosing signal.

  18. Anon#2 either you are the one talking nonsense or I can really learn something from you, which would be fine with me. I am hoping that since you took the time to write me, you would like to be understood.

    I draw trend lines in real-time and use them to trade, but I also draw them retrospectively for practice - the sharpening of my skill. If you'd like to see this done in real time, send me an email and tell me the ticker symbol. I'll email back to you a chart with the trend lines drawn every 5 minutes for an hour - yes, 12 emails in a row. Then you can decide whether your cynicism is justified or not. Sound like a deal?

    Your assertion that twice my TSI trend line does not touch the TSI *where it should* was provocative. I didn't know you were an expert in knowing where to draw the lines in the first place, and not even sure where these imaginary two lines are to which you refer. Where would you have drawn them?

    Finally, you are sure these two imaginary lines of yours would yield a losing trade. I guess I could just stick my head in the sand and buy off the daily chart and hope for the best. Sometimes I do that and often those turn out to be my losing trades. But if a person is paying attention and intent on NOT letting a trade headed in that direction, they would possibly buy off the daily chart, like the one you are referring to, but then monitor the situation using the TSI on shorter times frames - like the 4 hour and 1 hour. When I personally am trying my hardest to get it right, I may use the daily chart to give me a sense whether things look favorable, but I immediately start focusing on the faster time frames. So what may appear a losing trade to one person can usually be managed differently by another and for a profitable trade.

    Seriously - send me an email with a ticker symbol and suggest an hour you have free. And we'll go from there.

  19. John,

    Thank you for your hard work and willingness to share your ideas. I find it inspiring and endearing that you have such a calm demeanor and willingness to look at other ideas and issues that may challenge your ideas. I day trade currencies and other instruments, I often use a simple stochastic indicator and often draw trend lines as well as patterns on the indicator such as you. I also notice combinations of other analysis such as candlesticks, double bottoms, head and shoulder etc. When I get several lining up saying the same thing it all falls into place. Keep up the good work!