-- Posted Sunday, 5 August 2007 | Digg This Article
Panic in global markets as interest rate worries hit Wall St. causing a sell off that knocked the Hedge Funds hard prompting two failures and cautionary notices being issued. According to the doomsters it’s all over bar the shouting. Global markets have topped and its time to take a back seat. Not on my work!!
Two weeks ago in the last issue I detailed at that “The Dow has formed a sell divergence over the past few weeks and indicates a potential period of correction probably back to test the support at 1350. The same data is evident on many of the Euro indexes and also the S&P 500. It looks as though global general equities are about to take a breather.” Sure the markets were overbought and needed a breather, but the panic sell off is not the end. In fact sell offs of this nature are very rarely the start of a bear market, they are more likely to be the final stage of an old correction that has been in progress but gone un-noticed for some time. But the current dip is likely to take the Dow back to test the 12 600 level before it abates.
Of far greater interest was the inordinately high exposure of traders to the indexes and especially the ALSI 40 on the JSE. The open positions were crazy. When the leveraged positions went into the red the holders became forced sellers the market makers were forced to hit all the stocks that constitute the ALSI. This affects the gold stocks as well as the financials and industrials. Because the gold stocks are liquid they often seem to take the brunt of the selling. But there are some critical differences.
Many of the industrial stocks have top patterns whilst the gold stocks have bottom formations with the reverse head and shoulder predominating. In addition the relative strength data is turning in favour of the gold stocks.
It is interesting to note that the gold price bounced off its main $640 support level up to $685 and then corrected back in a classic Fibonacci 61.8% move. The same correction applied to Anglogold. This implies that the pullback is merely a correction in an ongoing bull trend and not a serious setback for gold shares. This effect is very visible in the charts of the XAU and HUI gold indexes as well as the FT gold index and Barrick.
Oil is hitting new highs and commodities in general remain in solid bull markets. So investors have to make up their minds whether gold is related to commodities, is a barometer of instability or merely a proxy for the dollar.
For the past three years I have been constantly bullish on commodities and analysed that markets are commodity driven. Nothing in my analysis has changed. Gold has been the laggard in the commodity sectors but once above the resistance at $670 should resume its full bull trend with a vengeance.
Finally it is necessary to continue to pay close attention to the Rand and its cross currency rates. Against the dollar the flat bottom triangular pattern remains intact. There is support at $6.80 and resistance at R7.20. These are the two critical levels for consideration. It certainly looks as though the currency is being managed in a tight range. But a new major trend will not emerge until one of these levels is penetrated. A similar triangular pattern is evident on the chart of Sterling and the Rand.
In this week’s issue I also include several resource stocks on the LSE that are of interest to European readers.
The FT Gold index broke out of its triangular pattern and pulled back to test the breakout level during the minor panic sell off. This is a classic second level buying area. It is also interesting to note that the RSI has no signs of any sell divergences and merely corrected from a short term overbought position.
The XAU Gold index also broke cleanly upside out of its triangular pattern and pulled back to test the break outpoint during the recent sell off. Once again this is a serious second level buying area.
Two weeks ago in the last issue I detailed that “The Dow has formed a sell divergence over the past few weeks and indicates a potential period of correction probably back to test the support at 1350. The same data is evident on many of the Euro indexes and also the S&P 500. It looks as though global general equities are about to take a breather.” The critical element is the 13200 support. If it fails a move to 12 600 is more than likely. Compare this top pattern to the bull correction on the gold indexes.
The JSE Gold index for 20 years has underperformed the JSE Overall index as detailed by the blue line. There is strong RSI data that indicates this massive downtrend is about to reverse into an uptrend that will indicate superior performance. In addition there was a buy divergence between the index and its RSI indicating a trend reversal. This happened and the recent pullback is a short term correction. The index needs to break above 2800 to confirm a new bull trend.
The $ / Rand continues trading on the cusp. It strengthened back to test the major support at R6.85 and then weakened back to test the resistance at R7.20. We are still in limbo on the currency. Until the breakout occurs it is prudent to sit on the sidelines.
Copper is still brewing up for an attack on the neckline resistance at $8200. Once through this selling level I expect to see the upside target of R11 000 met.
This analysis has been criticized by a supposed professional UK technician who thinks that reverse head and shoulders patterns only occur at trend bottoms. He needs to go back and learn the basics of pattern recognition 101 before he makes comments on this analysis. WHEN Copper hits $11 000 I will expect a groveling apology.
Silver has developed a slightly different pattern. There is a short term triangle with support at $12.25 and resistance at $13.3. The price needs to break back above $13,30 to trigger the next bull market phase.
Brent Crude has formed a sell divergence over the past few weeks. The chart is shown with all its divergence signals on both the MACD in the top frame and RSI in the bottom frame. There is short term support at $75 and a break under this would lead to a weakening back to at least $70. Caution should be exercised with dealing on the oil price.
The Platinum price also has a solid resistance at $134o that needs to be broken before it can move into the next real bull phase. But once through $1340 and $1600 is on the cards.
-- Posted Sunday, 5 August 2007 | Digg This Article
