The Coming Pause in S&P 500 Strength Against Gold
- Posted by Greg Harmon
- on October 21st, 2011
Gold ($GLD) was highly correlated to the S&P 500 ($SPY) over the last 3 years. That correlation broke down in August, just as the $SPY broke lower with a vengeance. But ever since the S&P 500 began to consolidate from that drop, the relationship has been moving back towards that correlation again. You can see this in the ratio chart of the $SPY to $GLD below. What does the chart suggest about the future? Let’s take a look.
Clearly the recent trend has been for this ratio to move higher. And the prospect for a further advance, relative strength of the S&P 500 against Gold, is reinforced by the rising Relative Strength Index (RSI) and a Moving Average Convergence Divergence (MACD) indicator that has crossed bullishly into the positive range and is growing. The increasing volume also bodes well for it. Often when a breakdown occurs there is a move back to retest the break out level. You can see this in the chart in early 2009. It is not a lock that it will get back to the previous range though as that same RSI indicator, although rising, is not yet over 50 or close to a bullish move over 60. Additionally the Simple Moving Averages (SMA) are all sloping lower and above the ratio. Also the candlestick forming for the current week, a Doji Star, is indicate of indecision, and could signal a reversal coming.
The long term trend remains for this ratio to move lower, indicating Gold strength at the expense of the S&P 500. But in the short run look for the S&P 500 to remain strong relative to Gold until this channel is retested. At the pace it has been moving this may only take a couple of weeks. What happens when it hits the channel will determine whether the S&P 500 can continue to advance for the remainder of the year or it limps sideways into the 2012.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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