Chart Symmetry

We last looked at monthly charts of the gold price and related prices to set certain parameters for gold. With the next month end approaching, we can revisit those prices to see how they are shaping up for the end of August

This analysis uses the principles of Chart Symmetry, as the foundation for exploring answers to the above two questions. CS is a system that that was designed around the observation that prices tend to change direction along certain preferred gradients. An article in the Gold-Eagle archives explains the principles of Chart Symmetry in more detail than the brief summary given below.

https://www.gold-eagle.com/south_africa/regional_analysts/joubert020699.html

Only daily charts were used in this analysis. The prices or values shown on the charts for the lines on the charts are therefore the values of the indicated lines for the next trading day after the end of the charts, which will be Monday, August 30th. These values are not predictions that the price will in fact complete a move by Monday to reach that line, but provides the reader a measure of the move that could take place if the price pattern does develop in the direction of that trend line. The steeper the line, the greater will be the change in the line value over time.

The key point to remember throughout is that the gradients of all secondary lines were derived from the gradient of the master line. The scope for the analyst to 'do his own thing' and develop a pre-conceived pattern is therefore quite limited. The patterns that are shown in the analyses are inherent in the charts, but these are not the only patterns that can be derived.

Introduction

A previous analysis tried to answer the questions of when the gold price would begin to move higher and, secondly, how far it could go over the medium to longer term. The analysis examined the long term POG in Yen and in US dollar and then used the US Dollar-Yen rate as the third leg of a "technical triangle" of charts to draw conclusions on the probable development of the other two charts.

These conclusions were then evaluated against what can be learnt from what is the largest – and the most liquid – commodity market in the world, the US bond market. The US 30 year Treasury bond was analyzed both as a price index in Yen, and in terms of its yield in US currency. Finally, the conclusions reached from all the charts were compared to find tentative answers to two questions.

Certain conclusions were drawn in the previous report. The first was that POG in dollar terms have found long term support at or just above $250. Yet, the yen price of gold has broken just marginally below important support – a fact that pointed to either a weaker POG or a stronger Yen, or both. The stronger Yen materialized, and now the question is how this will affect the other markets.

Gold Price in US dollars. Daily PM fix. Last = $253.8 (July was $255.6)

The daily chart of the gold price shows a descending wedge as the primary formation, with a bear channel that passes along the top end of the wedge.

Line P is parallel to M, with F the shallower derivative. The three breaks above line M are all three bifurcated breaks – similar in construction to the large break below line P that establishes the wedge pattern, except being much smaller. Such breaks frequently occur as mere temporary excursions outside a major formation.

Leg 1 of the wedge is already off-scale on the left of the chart. This means that POG is now on leg 5 of the wedge –typically, leg 5 is the final leg preceding the break from a narrowing chart formation.

As happened at the start of leg 4, a second rebound off a wedge boundary can take place before the price sets off to complete that leg of the pattern. Which implies that – given normal development of the wedge – POG can now either react off the double bottom or first reach support at line F before it finally starts the long anticipated bull trend!

A break below line F to reach the bottom of the bear channel at line P is a possibility, in which case the gold price will probably spend some time in the gap between the two lines before starting off on leg 5. This development is not considered likely at the moment. In the previous report it was stated: "The question is to decide which have the greater probability in terms of this analysis – a move even lower to reach $243 by the end of August, say, or a resurgence in the gold price, building on the base that has formed just above $250 over recent weeks – to start a great new bull market, as many suspect. And hope."

From what we see on the daily chart, the first alternative raised earlier now seems to be reflected in the behaviour of the gold price. POG has formed as base just above $250 and if no untoward news is unleashed onto the market again, September should see a rise in POG. The top end of the wedge is currently at $279. Leg 4 required 50 trading days – 2.5 months – to reach from the top of the wedge down to line F. It is to be expected that the fifth leg, leading up to the break from the wedge, will be completed in much shorter time as it will herald a major bull move in gold.

Gold price in Yen. Daily close. Last = ¥28280 (July was ¥29250)

The basic megaphone formation, M-F, was used in an analysis here some months ago when the gold price in yen was first analyzed. The analysis presented now is of technical interest as the lines all have different gradients that were derived from M. Line F is the first steeper derivative of M, with F3 and F4 the third and fourth successive steeper derivatives.

M-F1 is a megaphone, with F1-F4 and F3-F4 as two overlapping wedges.

Observe that wedge F1-F4 completed 6 legs before the break lower took place in the direction of leg 6 – an abnormal development for wedge pattern, where the break normally takes place in the direction of leg 5, at the end of that leg or after a slight hesitation.

It can be seen that the Yen price of gold (YPOG) was just at the point of breaking higher at the end of leg 5 of wedge F3-F4 when sudden weakness caused it change direction and break lower. This weakness in YPOG was not so much due to a weak gold price, but to a firm Yen that gained 9% against the US dollar since early July. Logical development of the chart subsequent to the break below F1 is for the YPOG to complete leg 4 of the steeper wedge, F3-F4, by reaching line F3 before reversing upwards into leg 5 of this wedge. With YPOG at ¥28280 and line F3 at ¥27590, the anticipated downward move is about 2.5%. If we assume that POG will not fall below $250, then a move down to F3 would imply a dollar-Yen rate of ¥108.6. If POG picks up in the meantime, the Yen would have to gain even more against the dollar to complete leg 4 of the wedge.

This analysis therefore indicates the Yen will remain strong against the dollar – with all the effects this would have on other US markets – perhaps reaching well below ¥108, before the situation reaches a stage where gold itself becomes attractive to investors and the bull market takes off.

US Dollar Yen rate. Daily close. Last = ¥111.45 (July was ¥114.5)

During August, the Yen continued the rally that had started in early July. The rally ended at support for the dollar at the bottom of channel, A-B-C, with B the center line of the channel.

As usual, all the lines were derived from M.

The YPOG chart shows that the Yen has to resume its bull trend against the dollar for that chart to develop normally. That analysis sets a target below ¥109 for the Yen in the near future. This move would require a break lower below dollar support at line C, probably to be followed by a steep move lower towards the bottom of channel Y-X, where support for the dollar currently lies at ¥107.

It was seen above that with POG at $250, the Yen has to firm down to ¥108.6 for the wedge F3-F4 to develop normally. Now if the Yen should complete this rally and reach ¥107 in due course, YPOG can still complete the wedge in the above analysis even if POG rises to $258 by then.

A move down to the lower boundary of channel Y-X – if such should occur – surely would be sufficient to invite serious intervention from the Bank of Japan and other interested parties. If the Yen should then weaken against the dollar, this would assist the bull trend in YPOG needed to break higher from the wedge, to stimulate demand from Japanese investors and to sustain the new bull trend.

US 30yr Treasury bond – Price index in Yen. Daily close. Last = 18.64. (July was 18.75)

The most likely reason for the Yen to remain firm and gain further against the dollar, would be if Yen investors in the US – either Japanese and Japanese institutions or hedge funds that made use of the Yen carry – decided the risk-reward equation has now turned in favour of investments in Japan. America offered by far the better opportunities for profit while the Yen was weakening in the aftermath of the 1995 trade agreement with the US and while US bond and equity markets were forging ahead.

In October 1998 the US bond market reversed direction and started its bear trend – partly because foreign investors received a major scare when the dollar suddenly lost a lot of ground against the Yen. The Dow Jones recently reached a new high, but the broader equity market seems tired, particularly as measured by the Advance/Decline chart. At the same time, economies in Asia may well have bottomed and could now present far better prospects for growth than what Wall Street does, with substantially lower risk.

There is thus ample reason for foreign investors to consider repatriation.

From the perspective of the Yen investor in the US bond market, the value of the 30-year Treasury bond peaked in October 1998. The suddenly stronger Yen at that time cost the foreign investor 19% in just 5 trading days. Erosion of bond value continued to where the current value of the 30-year T-bond is now 34% lower than at the high almost a year ago.

The bond market has stabilized over recent weeks, with the 30-year bond staying around the 6% mark. Last week a rally started after the FOMC meeting and briefly carried the yield down to 5.82%. However, by the close on Friday the yield was back at 5.98% and with the Yen also holding firm against the dollar, foreign investors were again being tempted to cut their losses and run for cover.

The chart shows line M as the steep resistance line of the bull market for Japanese investors at the time when a weak Yen and a strong US bond market combined to show excellent returns on their investments.

After the sudden collapse in this market when the Yen started tofirm and US bonds began to weaken, the Yen price of these bonds took a nosedive and established a weaker trend within bear channel X-Y.

Over the past few weeks the Yen price of the 30-year bond consolidated within a triangle between lines Y and C. Friday's weaker close was still above line C, but was on leg 5 of the triangle.

A break lower now seems on the cards, if the triangle develops normally. In that case, the traditional count on the break of the triangle would have line Z as target.

Given the likelihood of further weakness in this market and thus more incentive for the repatriation of foreign investments, the US dollar should continue to weaken.

The effect of this development on the US bond market should also be negative.

Yield on US 30yr Treasury bond. Daily close. Last = 5.98%. (July was 6.107%)

On the monthly chart of the US 30-year Treasury bond shown in the previous report, the yield had just broken higher through 18 year market support to give a significant bear signal. The value of this support trend line for the end of August is 5.80% - a level that was almost reached during the recent rally, but well below the Friday close at 5.98% and for now not a factor for the month end on Tuesday, 31st August. On the daily chart of the US 30-year bond, the yield is settled in a bear channel with the same gradient as the preceding bull channel. Line P is parallel to master line M, with lines A and B the direct inverse of line M.

The rebound last week off market resistance at line B is bearish for the bond. It ends the recent firmer trend within a period of sideways to firm consolidation that started in mid June.

While a new rally cannot be excluded, this possibility appears rather remote at the moment. Further weakness in the US bond market would also add pressure on foreign investors to sell out and accept whatever profit remains.

Conclusions

While the gold price did little over the past few weeks and is even lower than it was at the end of July, developments over the past month fit the overall long term analysis that was presented in the previous report.

These daily charts show that time is beginning to run out for the events discussed in the previous analysis and that some new developments favourable to the gold price are likely to occur within the next few weeks. These are, firstly, a stronger Yen and, secondly, further weakness in the US bond market – partly a result of the repatriation of foreign funds that will help to strengthen the Yen, and, in the process, probably other currencies as well.

These developments should help to undermine the optimism on Wall Street and thereby add to the incentives for foreigners to settle up and take the profits home. At the same time, all investors who are losing confidence in the "never ending equity bull market" will be looking elsewhere for a safe have where their paper prfoits will be protected against any sell-off that may occur. This will be good for gold.

We know that October is traditionally the month of weakness on Wall Street, but certain timing considerations in these chart patterns leave one with the impression that matters could begin to come to a head as early as the first half of September.