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February 19, 2007

D+
by Gary Tanashian

On 12/16/06 I attempted something I had never before tried (and likely never will again). I attempted a call on near term market direction based on several ratio charts and their perceived implications. If it is true that we are all students of the markets, I thought I would grade myself on this mostly ill-fated exercise because if you're going to put out stuff like this, that mostly falls flat on its face, I suppose you should also dig it's stinking carcass back up and answer for it. Self grade = 'D+'. I will break it down by its segments to show why I came up with this.

First up is the gold-silver ratio (GSR). Per the original chart it was noted to watch for the AROON indicator to cross into a positive trend on the daily, which it promptly did. Then it flopped back to negative territory within a few weeks, where it currently resides. In looking at a current version of the chart I still see the ratio above its low and quite possibly consolidating before another up leg. But that is certainly not a given and the ratio is back below the previous support at .48, which could act as resistance. As noted, when gold outperforms silver (along with all the other commodities it is currently outperforming), it is a signal that the economic environment is headed toward contraction. Since I did note that it would be important for this ratio to "confirm" a new trend and did not actually predict one, I'll cut myself a break with a B-.

The next ratio was the TNX-IRX ratio, or yield curve. Now here I really got the juices flowing with a trend reversal, break of resistance and what looked like a great bottom on the chart. For good measure, anyone reading the blog was treated to some Monty Python videos with sheep (bond herd) jumping out of trees. Well, that ratio has reverted to a new down trend and the best my stance can hope for is probably a double bottom. The bond herd appears to once again be calling the "all clear" as the Fed has inflation whipped and the economy is slowing. I am not so sure on either count, but the reality is that the ratio has flopped and I did not expect this. Grade D.

The next chart was a long term monthly chart of the same ratio. It shows nothing having changed with the indicator residing above the support from 2000, and we will maintain the view that whenever it does turn up it will be positive for gold and gold miners and a distinct negative for the broad stock market. Since this was not a timing tool and was not weighted heavily in the outcome of the original article, we will take a B+ grade with the caveat that its impact on the final grade will be muted.

Next up was the chart of the Dow, complete with bearish divergences and an ill-fated timing attempt based on what happened the last time the gold-silver ratio reversed on a daily chart. The result? A total mess. I will take a D- with an F being avoided because it is a neat looking chart :-). The Dow floats ever upward as I write, and in truth, this thesis fell apart when the GSR went into hibernation.

Finally we have the ratio that most of my work has been based on, the Dow-gold ratio. Here a top for the Dow was projected at 13,067 (later amended to 13,007). This was based on what looked like resistance in the ratio at 21.5 ounces of gold per Dow unit on the chart. I strongly believed, and wrote many times that the 605 area (59-60 for GLD) was important support for the metal and this held true. Where the analysis blew itself up was in the ratio's resistance projection as well as its timing. It hit 20.5 and reversed lower and the Dow remains in a short term downtrend vs. gold even as it continues to make new highs in nominal USD. The support for gold at 605 along with XAU holding 131 as noted on the blog were instrumental in my holding all positions (with white knuckles at times), but that gets mostly thrown out the window because my assumptions were incorrect and I went on to speculate on a major yield curve bottom and shorting opportunities for the broad market. I am pleased that gold is doing quite well and the miners look to play catch up as their bottom lines stand to benefit from gold's out-performance vs. just about everything else lately. But this cannot save me from a generous C-.

Notes: The following was added the next day and may still be applicable although as noted, the path taken to get there will have been much different than I speculated:

PS: Edit (12/17/06): Based on some feedback, I may not have made the above totally clear. I am looking for gold to hold support just above 600 before the entire complex heads higher and a top in the Broad markets, which may possibly be a very important top.

So ends the career of a would be market seer. I cannot see. That is why I will continue to listen, which is my MO. Take it all in. The good, the bad and the just plain ugly and run it through my own ongoing technical and fundamental theses which are subject to ongoing revision and finally it is on to the contrarian psych profile and gut test. It has worked so far. Lord knows I am not going to get it done on my grades alone.

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2008 Gary Tanashian

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