Interested in Where Gold is Heading? Follow the Yen

The chart below is that of the Japanese yen which you can see has been in a steep downtrend since 2012, losing almost 38% of its value against the dollar during that time. For those not familiar with currency movement, this is a BIG move for a currency but not unexpected considering Japan’s Prime Minister’s extraordinary move in an attempt to stimulate Japanese growth.

As you can see in the lower right hand corner of the chart price has (temporarily) halted its decline and has been trading in a range for the most part of a year. The interesting thing to note is this consolidation has allowed the (blue) 40 week moving average (40 WMA) to flatten out and begin to curl upward from a previous downward slope.  Additionally, price is now above that same 40 WMA for the first time since a brief stint in 2014 and prior to that, 2012. Additionally, if this consolidation continues and price moves higher it will be the first time these two conditions will have existed since 2011, the end of the last uptrend. One final constructive point to mention is that positive divergence has formed on the RSI momentum indicator telling us to expect a short term (and possibly more) reversal.

For those that have listened to my videos, for a bottom to take place after a steep downtrend, the above two conditions must be in place. Of course, just because they do does not guarantee a bottom is in but a bottom cannot happen without them. As such, this development deserves to be closely watched because a reversal in the Yen has some interesting implications which I would like to show you in my next chart.

The chart below is the same one as above except for the fact I have added the price of gold (dashed gold line) in the same pane as the price of the Yen. What should be obvious is that the price of gold has a very high correlation with the Yen, that is, it moves pretty much in lock step. Therefore if the yen does actually bottom, we would expect to see a commensurate bottom in precious metals if the correlation were to continue.

While the Yen hasn’t officially bottomed yet, I am very skeptical that it actually will. For now I see this attempt as just a corrective counter-trend move with prices to eventually move even lower still. This is due to my strong belief the dollar will eventually move much higher once done with the consolidation it is going through. As such strength in the dollar will have negative impact on the Yen, since they are negatively correlated. Even though I have my beliefs, I have to respect what the charts are telling us and as such let them dictate where to put investment dollars. If this turns out I am wrong and this is a Yen bottom, I will quickly look to confirmation in precious metals and likely find a home for (at least a small chunk) of our horde of idle cash.

While currencies are not great instruments to trade in brokerage accounts, because of inter-market relationships they occasionally provide early warnings for other things that are. As such, they continue to be worth following. 

September Market Recap Video

With September now in the books the question is will the the downside persist or have we seen the bottom and the start of the traditional year-end rally? 

Below is a link to my September 2015 Market Recap.

https://youtu.be/6xHKyibY1Z0

ADHD

The chart below shows the average investors holding period for stocks from just before the great depression until now.  I don’t know if the recent declines are more a reflection of the increase in the use of HFT computers or really echo investor’s (and society in general) shortening attention span. It’s likely a combination of these items and more.  Sadly and in spite of the direct correlation with performance, investors time horizons continue to shrink

One of the consequences of such a short investment time horizon is that investors have begun to fear short-term market events and volatility as much or more than the factors that shape prospects for long-term economic and profit growth that drive stocks over the longer term. Ironically short term time horizons add to the volatility, the exact same thing these skittish investors are trying to avoid.

Is This Why the FED Did Not Raise Interest Rates?

While the Fed has a dual mandate, there is no question they look at a plethora of data not just inflation and employment to determine what to do with interest rates. We are bombarded with so many regular reports but there is so much more going on behind the scenes that give insight into the shape of our economy that we aren’t necessarily privy to.  The good thing is the FED does not hide this information, in fact they publish it and make it available to everyone. Why it is not reported by the mainstream media is anyone’s guess but I thought the graphic below fills in some noteworthy voids.

While we may not have agreed with the FED’s decision to keep interest rates where they were, clearly these charts show areas of definite underlying economic weakness and concern in spite of positive unemployment and inflation data.

(As much as I would like, I cannot give proper recognition to the person who put this chart together as I was unable to find the author)

India ... on the Ropes

Below is a chart of India’s Bombay Sensex index. You can see they broke out of a sideways consolidation in October of 2013. For the next 2 ¼ years, price rose almost 50% topping out in March of this year. Since peaking, it has been a choppy downward move creating negative momentum divergence and eventually gapping down through the 3 year (blue) uptrend line.  Currently the moving averages are bearishly configured, pointing down and signaled a death cross in early May. Two months later it found at least a short term bottom stopping exactly where you would have expected, at the upper red horizontal support line. Looking to the left of where we are today we see that price has essentially gone nowhere over the past 19 months and has formed multiple different bearish topping patterns telling us there is a lot more downside if this support does not hold. 

Like so many investments I am watching, this is do or die time. Will price bounce off current support and move higher or will it consolidate for a few more weeks or months and then finally give way under its own weight with an ultimate target at the lowest red horizontal support line some 20% below?

Again, if you look left to the left side of the chart just below the upper support line you will notice there exists very little supply of buyers who might be available to step in and cull any move to the downside until you reach the target zone. As such any confirmed close below the 25000 level will likely be followed by a swift and intense move lower. While I like India’s long term outlook, the short to intermediate term has me leaning neutral to bearish.