Sometimes we cannot rely on the correlation between certain instruments as they suddenly interrupt the link. I added the U.S. dollar index (DXY) chart below to illustrate it.
Surprisingly, gold’s correlation (orange indicator sub-chart) went into a positive territory recently as it reached quite a decent number of 0.49 with an absolute correlation at 1.00.
Simultaneously, silver shows an almost neutral link, although it usually has a negative reading. All three of them dropped, but at a different speed. It indicates that the market has switched to the risk-on mode as safe havens were dumped. This time silver’s dual nature showed up as it could shine when the world is a gloomy place, and when the world needs it as an industrial metal.
Now, let’s look at the DXY chart more carefully. It is useful to apply the clone of the previous big move to the current trend from time to time. I applied the pink bars pattern (clone of the previous move down) from the current trend’s starting point. You could see it on the monthly chart, posted at the end of September as I marked it with #1.
The current move down was sharper than the pink clone in the middle of the way, but they finally met in the same area. We can see that the next move on the pink clone was to the upside in a larger correction ahead of the final drop. The current trend could reverse at this point to accumulate enough power to continue down with fresh sellers on board. The final point is located at the 88 mark.
Let’s move on to the metals now, and gold will be the next.
Gold still shows a very neat and predictable structure as the price hit the target area that was preset earlier between $1780 and $1750. All minimum requirements to complete the entire correction were met as the third leg broke below the valley of the second leg, and the second minor move (ii) emerged of the same size as the preceding minor move (i).
Moreover, the RSI has hit the oversold area, and then it has built the higher valley while the price hit the lower level. This indicates the Bullish Divergence, which could push the price to the upside.
Guessing tops and bottoms is a tricky exercise. We should wait for the first move to the upside, and the following correction to the downside first before it could be safe to call it a reversal. The broken mid-channel (red dashed) would act as a resistance this time.
At the opening, I have mentioned the periods of unusual correlation between regular antagonists. As I said above, DXY could follow the pink clone to the upside, and here we see that gold could grow stronger. This would keep the current irregular positive correlation in place for some time, at least until another drop of DXY.
The silver chart follows.
Silver could spoil this party where the stars aligned for DXY and gold. The white metal miscorrelated with both of them. It didn’t fulfill the minimum requirements to break below the mid-channel, not to mention that it didn’t retest the valley of the second move down. This action is still missing.
Look at the RSI sub-chart; there are no signs of Bullish Divergence that emerged on the gold chart. This entire mismatch could lead to a lagging price action of the silver price, as it should fill in the missing puzzle. Such fallouts we already witnessed before, but one could never get used to such misbehavior.
Only one thing could save silver from the further drop this time, and silver bugs wouldn’t like it, as it is a more complicated correction with another leg up but with the following imminent drop to tag the former bottom.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.