My e-Stuff: Dow flies high while Gold gets softy

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Introduction
Cheerleading for the large cap. Stocks seem to be at a peak level right now with mutual funds and hedge funds nearly fully invested in the sector. The Dow Jones industrial average hit day after day new nominal all time highs (not adjusted for inflation). At the same time we have seen the oil market being under pressure for 3 months now, in spite of the long term demand/supply outlook for this market.

How long before the end of the rally of the Dow?
What about gold in the short term? Consolidation or a third leg down?

Dow flies high
The Dow Jones is flying high with +15% during the last 3 months. The Dow index stands now at +9% over the 50 days Moving Average and +19% over the 200 M.A. Historically this is a significant high level above those two moving averages.

As Wayne Gretzky once said:
"I skate where the puck is going to be, not where it has been."

Just as Gretsky does, we ask ourselves where the puck (Dow) could be during the next weeks or even months.

Figure 1: Technical analysis of the Dow Jones Industrial average weekly chart

We are beginning to see slightly over bought tendencies of the RSI and the MACD technical indicators. Even if those indicators are not today in the over bought/"red zone" they will be there in the coming days/week if the rally keeps going on.

From a technical point of view, we think the Dow is coming closer to a major mid-cycle top, which opens for the possibility of a violent break out to the downside before Januari/Februari 2007. For now, it seems very important to monitor this index on a daily basis (keep your eyes wide open!). We will give our blog readers a clear cut signal when we think it is time to short the Dow, for now we ride this bull market with the folks from Wall Street.

Gold gets softy
During the last months we have seen the price of gold rise from $565/oz. to about $625/oz. under the last few days (this represent an increase of +10%). The HUI index (HUI index consists of unhedged gold equities) increased during the same period by roughly +19%. This implied that under this short period of time investing in the HUI index gave us 1:2 leverage to the price of gold.

Figure 2: Technical analysis of the spot price of gold

We can now see some short term profits taking, putting some short term pressure on the price of gold. There is a resistance level round $640/oz. and a support at $610/oz. (which is at the same time where the 200 M.A. should be during the coming days). A possible decisive break of the $610/oz. support level to the downside could put us on track for a third leg down for gold, with support levels at $600 and $580/oz.

The short term positive correlation between the price of gold and the EURUSD is still in place (A weakening Dollar against the Euro put the EURUSD higher which is a positive factor for gold).

Either way if gold is going up or down, we often like to see some confirmation from other base metals, which seem to be the case, with some weaknesses in Copper, Nickel and Aluminum.

Let's get technical on the HUI

We can see on the chart below that the HUI after the last weeks rally seems to have come to an end with a technical support level around 325 and resistance round 340. The HUI seems to come in a consolidation mode between those levels. The MACD and RSI technical indicators seem in the short term a little bit over bought which could give some more downside pressure on the HUI.

Figure 3: Technical analysis of the HUI index

Are we going to see a third leg down for gold before the next leg up or is it going to be a lateral type of consolidation for the HUI? Honestly this is a pretty hard call to make right now, we think that we will see some short term profit taking, if we broke the 325 technical support level we could come down to the 50 day M.A. at around 310 for the HUI.

Conclusion
Right now we have taken a "watch and see" positioning on the gold market, in the medium term (2 months) we firmly believe that the spot price of gold and the HUI index will be at a higher level than the ones we have today. In the case of a third leg down for gold, we will see this as the one of the last chances to load on cheap gold assets before the next major break out to the upside. And of course we have the "high fly" of the Dow Jones Industrial Average, on track against a wall which is "un"fortunately not so far from here...