So Was That The Bottom?
We certainly got an answer as to whether precious metals shares, or the gold price, measured against the Dow, were to define the extent of the correction last week, and gold won - again. The Dow / XAU Ratio moving to the Golden Retrace (61.8%) concurrent with a peak in the Dow / Gold Ratio might occur with a 12.5 print in the Dow / Gold Ratio, and both are close to these levels now. With the Dow / Gold Ratio not far from our 12.5 target, which as you will see below could (although not likely) represent the final low for the precious metals complex, one should be en guard regarding whether this is just an interim low, or the real deal.
As you may know from our previous work, and something that will be discussed in further detail below, in the end, whether this near term low is the big turn or not will depend on the sentiment backdrop as long as the bureaucracy's faulty and fraudulent paper pricing mechanisms (think COMEX, ETF's, options, etc.) are still generally setting world trade. This will all change one day, with pricing far more dependent on physical demand / supply and overall world demand to have greater impact on the trade eventually (likely set out of some other locale like China); however for now, prices are still set in New York and Chicago, so we must look at what these bunco artists are up to in order to have an idea where prices are heading next.
Along this line of thinking then, unfortunately for the bulls it appears more downside in precious metals is in store, somewhere between 10% (GDM) and 20% (HUI) for the shares, depending on which Fibonacci signature turns out to be the definer for the move. This can be seen in Figures 1 and 2 pictured below, that being the weekly plots for the Gold Miners Index (GDM) and Amex Gold Bugs Index (HUI). Both have Fibonacci signature defined head & shoulders (H&S's) patterns present, with the target on the former 600, and 150 on the later. (See Figure 1)
Many are now looking for a double bottom in the HUI, and precious metals shares in general, when it hits a double bottom at the 2008 lows, down at 150. The fact so many are looking for this, combined with aggressive speculator (think NUGT traders) propensity to buy the dip still alive and well, unless this changes before prices decline further, one must be prepared for prices to hit this target (if not further), a view that would be confirmed if open interest put / call ratios continue to fall across the complex into this apparent eventuality. (See Figure 2)
Moving onto Figure 3 now, we have a one-year daily plot of the Dow / Gold Ratio in order to look a possible counts because it's likely getting close to topping out. The count presented is suggestive a move to the 12.6 proximity is likely directly ahead, where if traced out, leaving only one question in mind, does it ultimately go to 15 (think 233-month EMA discussed here) or stop here? Unfortunately this question cannot be answered right now, however we should have a better idea once we see how the pullback off a 12.6 vexing develops. Logic would tell you a trip to 15 is definitely possible if real rates keep rising, which is the case, so you should know this is possible. (i.e. although it's not likely central authorities will maintain tough / taper talk much longer.) The Fibonacci signature appears aggressive at this point given the negative divergences in key indicators, however with the signatures in Figures 1 and 2 in mind, one must remain open to any outcome, especially if liquidity conditions become unruly this fall. (i.e. this should be expected given we are coming off record margin debt levels.) (See Figure 3)
Using this as a segway, and swinging back up to put the finishing touches on this discussion, if the 600 area on the GDM does not hold, a fall to as low as 300 becomes possible (if the double bottom does not hold [it should]), which would take the HUI below 150. It all depends on when the aggressive speculators become exhausted and stop buying calls. It's not looking good in this respect because crack addicts generally don't stop until they are forced, which means they either run out of money or die, which is likely also the fate of these NUGT gamblers. The powers that be sure knew what they were doing when they allowed this thing, this NUGT thing, into the precious metals arena, because it's got the real degenerates hooked. This can be seen in updated US index (and ETF) open interest put / call ratios attached here. Some ebbing of the enthusiasm is beginning to appear, but again, the aggressive gamblers are still lost in space, so further weakness must be expected as central planners undoubtedly still have the machines set on kill mode.
There are diamonds developing in both the NASDAQ 100 (NDX) and Transports (TRAN) to Dow Ratios that have further to go before the break, but never the less these breaks are coming, and when this happens it's difficult envisioning such breaks being higher. This sentiment is re-enforced with the price action over the past couple of days with everything including bonds being sold on the basis of comments out central bankers that QE doesn't work, and they will be pulling back on this practice. If you believe this bullshit (BS) story then I've got a bridge in Brooklyn you might be interested in, so please call. Other wise, one might think the bankers are attempting to attract / keep short sellers in the markets so they can squeeze them again, which is more likely the case.
Interestingly, results are mixed in this regard, as you can see in key updated US index (and ETF) open interest put / call ratio, attached here again. While ratios for the OEX, DJX, NDX, QQQ, RUT, and XLF have seen marked gains, ratios for SPY, DIA, and VXX (shooting higher) moved violently in the opposite direction, showing the retail trade is now bullish. (i.e. or exhausted short sellers.) Either way the bureaucracy's price managers need to attract more short sellers back into the fry at the margin, or margin debt related liquidation is going to take stocks substantially lower. Again, as it looks now, it appears this is all planned on the part of central planners, taking some of the air out of stocks and bonds at the right time (over the summer with lower volumes), along with killing precious metals.
Here too however, the powers that be are having mixed results in terms of accomplishing their objectives sentiment wise, where although ratios are mixed as well post expiry, if the trend towards perma-bull betting continues to fade (as increasing numbers begin to think real rates are heading higher), conditions for a rally will finally be present. Remember, we want to see those ratios well above unity before beginning to bet aggressively bullish ourselves, especially with the technical pictures present in Figures 1 and 2 above.
If you follow that rule, the odds of one buying close to the bottom will increase drastically - so don't forget.
See you next week.