What A Golden Web We Weave

02/28/05 08:37:51 AM

by Koos van der Merwe

Looking at a chart of the Dow divided by the price of gold can present an argument against a possible Dow collapse.

Security: DWIX / GLDL
Position: N/A

Looking at a chart of the Dow divided by the price of gold can present an argument against a possible Dow collapse as suggested in my February 24th article, "A Triple Top For The Dow."

Figure 1 is the Dow / London gold price. Note how the price has completed an Elliott wave retracement, and appears to be starting a new bullish wave up. This move could either be a 5 impulse wave, with wave 1 and wave 2 completed, and the start of wave 3 building a base, OR it could develop into an "abc" retracement upward. The relative strength index (RSI) is confirming an upmove. The final pattern of this move will show itself sometime in the future.

Note, too, how the move up found support at the 50% Fibonacci retracement level of the bull run, and rose to find resistance at the 38.2% Fibonacci level. I have added three Fibonacci levels (38.2%, 50%, and 61.8%) from the high at V to the low at C. Any one of these levels could act as a resistance level to a bull run, and the RSI should be carefully watched for an oversold position as the price approaches any of these Fibonacci levels for direction.

Figure 1: The Dow / London Gold. Note how the price has completed an Elliott wave retracement, and appears to be starting a new bullish wave up.

Graphic provided by: AdvancedGET.

What does this all mean?

a. Analysis suggests that the Dow should start weakening as the US economy weakens. However, this chart suggests otherwise. Should the price of London gold stay as is, the suggestion is that the Dow will strengthen, not weaken.
b. Should the price of gold strengthen, then the movement in the chart will be down, a move not suggested by the RSI.
c. Should both the Dow and gold weaken or strengthen simultaneously, then the movement will be sideways.
d. Finally, Should gold weaken and the Dow stay as is, then the chart will move up and fulfill the forecast. For gold to weaken, we should see a strengthening in the US dollar, which appears unlikely. (See my article of February 15, "Forecasting The US Dollar".)

I am always reminded of the story that an economist spends half his or her life forecasting the movement of the economy, and the other half determining why his forecast never materialized. In trying to interpret this chart, I feel very much like that economist, so I shall stick to the technical rules, which calls for interpreting what you see in the chart. At the moment, my charts are telling me that a strengthening Dow or, for that matter, a weakening gold price is not on the cards--but then anything could happen in this uncertain world of ours.

What an intricate web we weave!

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.