Commodity, Currency, Gold, and Equity Market Analysis by Dr. Christian Normann  
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Weekly Market Analysis Based on Closing Prices, Friday February 13th 2009

Gold broke out of a reverse head-and-shoulder formation marked by the downward-sloping green neckline.  Gold is also back above its blue 200 day (43 week) moving average.  On a weekly close 1 percent or more above $1035, gold's multi-year uptrend will likely have resumed.

On the other hand, a weekly close 1 percent or more below the green neckline, horizontal support, and 200 day (43 week) moving average - all presently located around $850 - would increase the likelihood of a retest of the recent $681 low.  A weekly close 1 percent or more below $681 would open the door for a test of the $650-$635 level that represents the current location of gold's long-term (2001 to present) thick, blue trendlines.

 

The Amex Gold Miner Index is pushing into an area of significant resistance between the 200 day (43 week) and 300 day (65 week) moving averages.  Just above that area, horizontal resistance around 370 comes into play. 

A break above 370 is needed to confirm the resumption of the multi-year uptrend, while a break below the 260-240 area would indicate a likely test of the 2008 low near 150.

 

The US Dollar (as measured by the US Dollar Index) appears to be in a long-term uptrend since breaking cleanly back above the critical 80 level. 

The 80 level finally broke in the fall of 2007 after having been tested on five separate occasions over the past two decades.  For now, as long as the USD Index does not have a weekly close 1 percent or more below the 80 level, the long-term trend is presumed to be up, with the next likely target being horizontal resistance shown on the chart below at around 92.5.  Should the Dollar manage a weekly close 1 percent or more above 92.5, the next reasonable target would be the 102-106 range, as represented by horizontal resistance and the long-term downtrend line.

 

While U.S. and World equity markets appear to be in multi-year downtrends, they might still be in a multi-month counter-trend move to the upside as long as there is no weekly close 1 percent or more below the 2002 low around 770 (marked by the thick red line on the chart below).  Likely initial upside target for the S&P 500 index was around the 940-980 level, as marked by the two green horizontal lines.  Further upside, possibly to around 1100, would have been plausible on a break of the 980 level.  However, the 940 level was reached in January, and that may well have been the end of the rally given subsequent market action where the S&P index has fallen almost all the way back to the 2002 low for another attempt at breaking that level.

Also of significance, the 200 day (43 week) moving average tends to offer stiff resistance during major downtrends, and it is currently located around 1060, but rapidly declining toward the 1000 level.  The plausibility of breaking 980 and heading up to 1100 has significantly diminished now that the 200 day (43 week) moving average has fallen well below 1100.  Furthermore, while bear market rallies often push a few percent above the 100 day (21 week) moving average, they rarely push more than 4-5% above it, likely capping any future rally attempt at 980 or lower.

Once the market hits a final bottom, all the moving averages are almost certain to be broken on the upside, but that may be another year or more away from happening.  For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak).  During the 1929 to 1932 market collapse, the Dow Industrial index took 34 months to hit bottom (down 89% from the peak).  So far, the S&P is only 16 months into its current bear market.

When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to at the very least see a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting many years.  But the start of any kind of bull market (and not just a multi-week or multi-month bounce) is likely far into the future for now.

Global, European, and Asian (ex-Japan) equity indices are displayed below, and the strong correlation with the U.S. stock market is unmistakable:

 

Commodities have given no clear sign that the downtrend which started in July last year has run its course.  The 2001 to 2008 uptrend ended with what looks like a buying panic where commodity prices went parabolic and then crashed through both the 200 day (43 week) and 300 day (65 week) moving averages, as well as the thick, blue uptrend line.  A close back above both of those moving averages is necessary in order to say with some confidence that the downtrend likely has run its course.

 

The crude oil chart strongly resembles the commodity basket chart above.  Oil is still holding the $41-$38 level on a weekly closing basis, but could be on the verge of decisively breaking down through that range, after which there is no likely support area until around $26-$25.  Should oil fall toward $25, most commodities are likely to follow suit and make new bear market lows as well.

Conversely, if oil breaks $50 on the upside, the bottom may well be in.

 

Natural gas is on the verge of breaking the $4.50 area, after which a 33% drop to around $3.00 and the long-term thick, red uptrend line becomes likely.

 

Copper has bounced weakly with world equity markets, but remains below its rapidly falling long-term moving averages.  A further fall down toward its pre-2003 range of $0.95 to $0.60 may be in the cards.

 

Given the events presently occurring in world financial markets and the global economy - the likes of which have not been seen since the 1930s - it is vital to protect oneself:

While the Japanese Yen and US Dollar appear to be in long-term uptrends against most other currencies, the future borrowing needs of the U.S. (likely to be accomplished through money-printing) could end that uptrend very suddenly.  Owning other currencies such as the Euro, Japanese Yen, or Canadian Dollar might help protect your wealth.  However, owning gold may well turn out to be much better insurance against enormous bailout and stimulus packages to be implemented not only by American, but also European and Asian governments throughout the next several years in misguided attempts to boost borrowing and consumption.  Rather ironic, given that it was precisely too much borrowing and consumption that got the world into this situation in the first place.  It may even turn out that Europe will be in significantly worse trouble than the United States years to come due to several factors I will explore in future weekly updates.

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