9/27/2014

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GOLD REPORT/U.S. EQUITIES

(09-24-14) Please read comments below the charts.

In our report posted on 1/18/2014 we gave three different scenarios which we thought were the most probable
outcomes over the following six months. Our reasoning behind our thinking was the following:
1) The low in December could have been the second bottom of a double bottom pattern, in which case gold
could have rallied up to resistance at 1400-1450, this outcome was depicted in scenario#1 (the green line)
2) The bear market was still in full force, in which case the low in December was going to be penetrated after a
brief rally up to 1300-1350, this outcome was depicted in scenario#2 (the red line)
3) The bear market would take a rest, and gold would try to form a base from which to rally again. Given that
the decline had lasted two years, a one year base seemed quite appropriate, this outcome was depicted in
scenario#3 (the blue line)
CHART#1

As it turned out, scenario#3 took place, however, the process took almost two months longer, and the
secondary high at point "C" was a lower high, compared to the first high on point "A" Both these developments,
could have significant implications going forward. (CHARTS 4A, 4B, and CHART 10)
CHART#2

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The chart above is a monthly chart of gold, along with the US dollar since 1999. Notice that gold remains
below its 22 month moving average, which by definition implies that the three year bear market is still in force.
Meanwhile, the US dollar has been forming -potentially- a ten year bottom, and its first significant resistance is
at 90.
CHART#3

The chart above is a weekly chart of gold and the US dollar also since 1999, and we can see in more detail the
same that we commented for the monthly chart.
CHART#4A

Lets assume that a) the US dollar has indeed been forming a massive bottom since 2004, and b) there is
symmetry in the bottoming pattern, if that is the case, then the points A1, and A2 are symmetrical bottoms,
and the points B1, and B2 are also symmetrical bottoms, which imply that the US dollar could rally all the way
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back up to 120 over the next 2-3 years! First confirmation of that scenario would be a break above 85, and
second confirmation a clear break above 90, neither has happened yet, and we do not know whether such
outcome will materialize, but if one is trading gold, then it is necessary to keep it in mind.
CHART#4B

One interesting development of the last few months is the out-performance of gold stocks versus
gold. So, lets take a closer look at both gold stocks and their technicals.
CHART#5

The chart above is the Gold Miners Bullish Percent Index (the BPI is a breadth indicator based on the number
of stocks on Point & Figure buy signals) notice the steep positive divergence.
CHART#6

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The chart above is the XAU (bottom graph) along with the gold/XAU ratio, which is approaching the 15 level a level that has marked all important bottoms since 2013, and it implies that another bottom ought to be
5%-8% lower from current prices.
CHART#7

The chart above is proprietary and it shows the 25 DMA of inflows/outflows for the XAU. The black line is the
inflows, and the red line is the outflows. Notice that bottoms have been concluded and rallies start when inflows
cross over outflows. At the moment, not only we do not have a positive cross-over, but also the outflows are
still rising, implying that even a trading bottom is not yet at hand.
CHART#8

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The chart above is proprietary and it compares the UP volume versus the DOWN volume for the XAU. The
black line is the up volume, and the red line is the down volume. Notice that bottoms have been concluded and
rallies start when the up volume crosses over the down volume. At the moment, not only we do not have a
positive cross-over, but also the down volume is still rising, implying that even a trading bottom is not yet at
hand.
CHART#9

The chart above is a proprietary moving average of new lows for stocks that make up the XAU, notice that all
three previous bottoms have occurred with a spike near, or, above 3, at the moment this indicator is at 1,
which implies that even a trading bottom is not yet in.
CHART#10

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The chart above is the cumulative volume graph for the XAU, and we need to notice two things. First, the
negative divergence between the two tops; although the second top matched the first in price, it did not, as far
as cumulative volume was concerned, it made a lower high at point B. Second, although price made a higher
low at point D, cumulative volume almost matched its previous low. At the moment it is still falling and it is near
the previous two lows, implying that if it breaks lower, more than likely, so will the price.

Conclusion: The recent decline in gold prices is part of the basing process that started in July of 2013, and
once it is concluded the odds favor at least a trading rally. One thing that needs to be kept in mind is that a
basing pattern is not bullet-proof, sometimes they fail -the rally that follows fails, price turns back down and
makes new fresh lows. So, although we can see a rally starting in gold within the next 3%-5% percentage
points lower from current levels, and in gold stocks within the next 5%-8% percentage points lower from
current levels, it is not clear at this point if that will mark the end of the bear market, and the beginning of a
multi-month rally. The reason is; there is a possibility that the US dollar has concluded a 10 year bottoming
process and it is about to embark on a sustained 2-3 year rally, if that is the case, it will put pressure on gold at least initially. The 85 and 90 resistance levels for the US Dollar Index need to be monitored closely along with
the behavior of gold/gold stocks as the dollar approaches these levels. The outperformance by gold stocks in
price, has not been matched by their internals -as shown by our proprietary indicators- which implies that it
may have been more of a function of an overall rising stock market, than in pure strength of their own.
Both gold and gold stocks ought to be near -at least trading bottoms- and given the extend of their decline,
the odds favor that the resulting trading opportunity will be worth participating into. Thus, we do expect to go
long within the next 1-3 weeks, and in that case we will notify our subscribers via another report, and email.
** In our report for U.S. equities on 6/16 we gave an upside target of 2030 sometime between
mid-July/mid-Aug. Also, on our report on 7/22 we pointed out the divergences in our intermediateterm market timing model had been going on since January 2014. The fact that-just like gold- it also
took another 2 months for the upside target to be met/price pattern to be completed, and the
divergences continued/worsened over the same period, has significant implications both for the
intermediate and the long term outlook for U.S. equities, and we'll elaborate on it extensively in our
upcoming report/analysis for U.S. equities.
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