With Gold in making new highs, technicians should ask - which is leading... Gold or the miners?
The daily chart above plots the SPDR Gold Trust (GLD, black OHLC bars) versus Newmont Mining Corporation (NEM, gold line on close, prices plotted to the right axis). Vertical and horizontal dashed lines (gold for NEM, black for GLD, prices plotted to the left axis) denote date and price for the recent highs in each instrument. Trend lines (colored to match their respective instrument) denote former down trends in both GLD and NEM, and a recent triangle in each security is plotted. Lastly, a 1 month, 3 month, and 12 month rolling correlation study is plotted in the indicator area (red, blue and black respectively).
Despite a sell off following the commodities bubble of 2008, Gold did not suffer as nearly a precipitous a fall as others - Crude being the best example. The miners however, represented here by Newmont, fell in line with the stock market brethren. Simply put, there was "nowhere to hide" from a securities standpoint during the financial turmoil of 2008 into 2009 no matter the baseline operations of the firm. Newmont was no exception. NEM fell below $25 per share on this chart off a former high north of $56. The Gold Trust, however, fell relatively less, dropping from $100 to near $70 over the same time period.
What's interesting on this chart is the behavior of each instrument into the high of 2008. Note that NEM peaked in Jan 08, while GLD continued to rise into Mar 08. Each would prove to serve as the formative beginning of a one-year down trend. While both securities bottomed together in late 08, this co-movement has proven to be short lived. Indeed, GLD has broken earlier than NEM in recent weeks by nearly the same lead-time as NEM peaked before GLD in early 08. This is most clearly observed using the symmetrical triangle in each instrument - a clear continuation signal.
Common misperception is that Gold and miners tend to trade in gear. Technicians know what many fundamentalists do not - these securities are rarely correlated. While values vary depending on source, positive correlation is thought be anything greater than 0.70. The red line in the indicator region (a 7 period correlation study) of the chart demonstrate that there are in fact brief moments in time when the misperception holds true (advancing above 0.70), the longer time period one analyzes the less true this statistic becomes. In fact, while the blue line (90 period correlation) reaches near positive correlation from time to time, the black line (365 period, or rolling 12 months) demonstrates some level of non-correlation exists.
One takeaway is that the short-term spikes tend to come when a reversal or breakout is in progress. Combined with a trend line study, in this case further emphasized by the breakout from a symmetrical triangle, we see the recent correlation spikes are in fact justified. For the moment, Gold is in fact leading the miners. Technicians should follow the behavior of the mining stocks more closely has the trend in Gold continues. Having broken its previous high, GLD is in uncharted territory. Meanwhile, NEM looks poised to attack its former high on the back of the GLD advance. A quick review of premarket trading verifies this as well whereby NEM is breaking higher.
Questions to ponder:
1. Do you use statistics in your work as a technician?
2. What visual tools do you use to analyze statistics in your study of financial markets?
Jeffery E. Lay, CMT
President
Talon Eight, LLC
www.taloneight.com
Source: Market Technicians Association
