Saturday, November 17, 2007

Intermarket Analysis of the US Dollar

For this past week, gold was down $47.70, and gold stocks, as measured by GDX, were down by 6.68%. As well, the resource laden TSX Composite Index dropped another 340 points this week.

This post will provide additional evidence to show that commodities are in correction mode. Let's first have a look at silver. Here is a daily chart of silver going back to February 2006:

What I find significant about the above chart is that silver has just formed a bearish double top formation with its old May 2006 high. The well known technical analyst of the 1920's, WD Gann, stated that if the distance between the tops of a double top formation are far apart, the bearishness of the pattern is increased. I therefore feel this event is a major negative for silver.

Also in the above chart I have highlighted the major volume spikes that have occurred for this ETF. These volume spikes encapsulate the fear and greed present in the market, and show when there has been climactic buying and selling.

Finally, if you look very carefully at the above chart, you will see that the Silver ETF has just formed a bearish island top formation. I have enlarged this pattern in the image below:

In my view, islands represent major shifts in psychology in the market. In this case, the shift was from bullish to bearish. The above image shows that silver was demolished on Monday, and although not shown, this price action occurred on heavy volume. Obviously, this is a bearish combination.

This next chart shows a daily chart of the US Dollar on the top panel. On the bottom panel, we have an MACD histogram of the ratio of US Stocks divided by International stocks.

This indicator can help detect strength and weakness in the US Dollar. The rationale behind it is that when investors feel that the US Dollar is going to start strengthening, they will be more inclined to pull some of their money out of international stocks, and reposition themselves in American stocks, to take advantage of dollar strength.

Everything else being equal, investors would rather be invested in stocks where the local currency is rising. This means that movements in this ratio, which are translated into movements in the MACD below, usually show when US Dollar strength is in the pipeline.

I have highlighted the areas where the intermarket picture was hinting at US Dollar strength. I think that 5 out of the 6 signals were fairly accurate. What is important to note is that we are very close to getting another signal.

If the US Dollar finally finds some strength in the coming weeks, it will add negative pressure to commodities.

Also worth mentioning this week is that Gold put in a large red candle this week, and the TSX is clearly in a downtrend. I would definitely like to see a positive moving average cross over before going long again.

So, all in all, at this time, I feel that gold, silver, and the TSX are in a corrective mode, and I did not see any evidence in the charts to indicate a reversal at this time.

For additional analysis of the TSX and Commodities, I highly recommend the following blog. Thanks for visiting.


The Word said...


Thanks for the plug...! However, my intention was to comment even before I read the referral.

From time to time you amaze me with the depth of your analysis and the angle you take to make your point. It's too bad you don't write more often. I don't want to make you blush, but sometimes you are brillant.

I always look forward to what you have to say if only because it's different, well mannered, well thought off and straight to the point.


Danny Merkel said...

Thank you for the kind comments. I feel the same way towards your blog.

As I said before, you and Headline Charts are probably the best technical analysis blogs on the net right now.

Because I spend 11-12 hours each day at my job, I will not be able to post more often than I currently do, but perhaps in a few months I will have more time.

Thanks again for the comments.

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