Transportation-Industrial Stocks Ratio
Hints at Higher Precious Metals Prices
By Przemyslaw Radomski, CFA
It seems that
recently the whole precious metals sector has been devoid of the strong
relationships with currencies and stocks (namely, strong negative correlation
between gold and silver and the USD, and a positive one between metals and the
S&P 500 Index) that we are so much used to, which makes the straightforward
inference somewhat more complicated. But it is still beneficial to monitor the
above-mentioned markets – firstly, in case these interdependencies get back to
normal and secondly, to see if any important buy and sell signals are flashed.
The outlook for the
gold price in April 2013 remains rather
unclear if you take a look at the gold price charts only, so let’s examine other
markets in order to see if there’s anything on the horizon that could drive gold
prices higher or lower shortly. We’ll start with the USD Index very long-term
chart (charts courtesy by
The index has
been trading at about the same level and pretty much sideways for some time now.
On the above chart you can see it as a pause. Comments made in one of our
previous articles remain up-to-date:
here is now quite significant, and we must consider the possibility that the USD
Index might move higher in the medium term. The situation in the short term,
however, is overbought, so it is likely that we will see the index decline soon
and then we’ll see what happens next.
correction stops at the declining support line, around the 80 level, then the
breakout will be confirmed, and a rally will likely follow. If however, the
correction takes the index below the 80 level, the whole breakout will be
invalided, and lower values would probably follow. At this time, the medium term
and long-term outlooks are somewhat unclear based on this chart alone.
Let us move on to
the short-term picture for the U.S. currency.
We see a
breakdown below the rising short-term support line here. This chart is a bit
bearish, at least more bearish than it has been in previous weeks. The
RSI level is no longer overbought and the
decline is not visible yet, but the breakdown was confirmed.
cannot rule out a move to the July 2012 high before the next decline, an
immediate decline appears possible now. Such a move could finally trigger a
rally in the
precious metals. This is no sure bet,
however. Recent moves to the downside in precious metals prices while the USD
Index was also declining were not very encouraging.
Now, let’s have a
look at the EU currency from a long-term perspective.
The index level
is right at our expected bottom now. It moved to the lower bottom of the target
area and then reversed. This target area is based on the 50-week moving average
and the previous low.
illustrated an analogy between current trading patterns and those seen in 2010
with red rectangles in this week’s chart. Back then the bottom formed at about
the point where we are today in the current trading pattern: between the 50-week
moving average and the previous local low. A bottom forming now would make the
situation more bearish for the dollar. It seems that the Cyprus events have
caused the euro to decline recently and now – as the situation gets less and
less coverage – euro moves back up.
Let’s move on to
the general stock market now – we’ll use S&P 500 Index as a proxy here.
In this long-term
chart, we see that there has been no breakout although stocks did move higher
early in the week. Overall, the situation has not changed so much in the past
two weeks as stocks are still overbought and the RSI level remains above 70. It
seems that another breakout attempt is quite possible so the very-short-term
trend remains up.
happens after stocks move to their 2007 high is unclear, but it’s very likely
that the reaction – whatever it will be – will be important. If stocks break
out and then invalidate it, and at the same time precious metals move to/below
and then invalidate such a breakdown, we will have a very bullish and very
important signal for the precious metals market.
We’ll now have a
look at our final chart for today – transportation-industrial stocks ratio –
which has bullish implications for the whole precious metals sector.
Here, we see an
important development this week as the transportation stocks declined. This
resulted in a significant decline in the ratio and the ratio has been inversely
correlated with the precious metals for some time now. This relationship has
been quite strong week-to-week, especially since last August. It seems that at
this time, it could have positive implications on the precious metals market.
So, in short, a lot has happened, but not much has changed yet.
up, the USD Index is quite likely to decline shortly,
even though the very short-term implications are not as clear as we would like
them to be. Early week declines in the USD Index did not cause precious metals
prices to rise, they actually declined as well, so the implications are not
clear at this time. We have seen a positive clue in the declining
transportation-industrial stocks ratio, which could have a positive impact on
the precious metals. Overall, the implications are unclear to a bit bullish for
the very short term. Once the S&P moves above its 2007 high or fails to do so
and declines significantly, we will have a clearer picture here.
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Thank you for reading.
Have a great and profitable week!
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Trading Website - SunshineProfits.com
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Seeing is believing.
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
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Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
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