Charles Dow, editor of the Wall Street Journal in the 1880s and co-founder of Dow Jones and Company, dreamt up the indices of that name which are still used extensively for US stocks. A firm believer in technical analysis, he collated the articles he wrote for the paper into one of the first textbooks on the subject. Core to his thinking was that price action in one index must back up that in another one. Non-confirmation is when they are pointing in opposite or diverging directions.
Today we take this concept quite a lot further, positing that similar and related instruments, be they commodities, individual shares or currencies, should confirm each other’s outlook. Often, we compare their performance using rebasing charts, starting at 100 on the first day and plotting percentage gains and losses to date. This is especially useful when looking at groups and categories of assets.
Precious metals have not sung from the same hymn sheet this year, and I have found analysing them difficult and frustrating. Priced in US dollars per ounce in the wholesale global market, dollar weakness since January has obviously influenced these.
Spot gold has been the rogue recently, breaking above secular trend-line resistance taken from the record high at $1,920 in 2011. It had flirted with this line in April and again in June, but only managed a clear break in August when the feat was easier because of the line’s downward slope. Volume since increased considerably, suggesting die-hard bears like myself were forced to cut positions and possibly also go long. Three consecutive weekly declines in September, known as three black crows, are a bad omen for the bulls. It hints that the break above $1,300 was false and that holding above here will be difficult in the coming months.
Silver has been better behaved – and subdued – trading cheap relative to its historical ratio to gold. Trading around $17.35 per ounce for most of this year, it’s the halfway point between 2015’s low (the low point since 2011’s record high at $50.00) and 2016’s high. Three black crows follow a shooting star above $18.00, an area that capped twice before this year, suggesting it will continue to struggle above here. We favour a drift towards this summer’s low – and then maybe more.
Platinum has fared even more badly, slumping by a hefty $110 in four weeks. A doji spike high peaking at $1,020 per ounce forms the centre of an evening star three-candle formation, the rise preceding the doji mirrored the week after it. These led to one of the biggest monthly drops in a while and hints that a break below long-term support at $880 to test $800 is on the cards. Note that against gold it’s close to its lowest ever ratio.
Palladium, another of the platinum group metals, is a very different beast, marching in a trend channel at a 45-degree angle across the page. At its most expensive since the record high of $1,125 in January 2001 when a large US vehicle manufacturer tried (needless to say) unsuccessfully to corner the market. This year it’s different because the rally’s been steady rather than parabolic, as it was both on the way up in 2000 and on the way down in 2001. Onwards and upwards!
Charts for this piece Gold, silver, platinum, palladium.
