Welcome to our weekly series of Market Updates. On this Thursday Morning, Equities took a hard knock from overseas markets & opens with a gap down of 70 points. This happened after two successive closing above 9500 for the first time ever.
Let’s come to today’s topic. Intermarket Analysis goes beyond traditional chart analysis & tries to quantitatively measure the inter-relationship between two different markets. Today, we take up one such relevant example with a very simple vanilla approach as follows. It must be emphasized that real life analysis are not this simple & involves statistical tests to validate any relationship between two markets. But here, we are skipping this test & assuming that Gold has an inverse relationship with US Dollar.
We see an interesting pattern brewing up in precious metals segment, especially in Gold. The adjoined diagram (Exhibit 1) of Dollar Index shows that the US Dollar has lately been weak against five major currencies. This is evident from the following facts: (1) Lower top formations on Dailies which is a trademark of a downtrend & (2) Dollar Index sinking below its major Moving Averages eg, 50 & 200 Days.
Since commodities are mostly denominated in Dollar term, a weak US Dollar should spell good for the commodity bulls. Now, let’s turn our focus to the Gold prices on Daily Chart (Exhibit 2). We see, that (1) the yellow metal is forming a Higher Bottom formation, which is a trademark of an uptrend & (2) Yesterday, it tore away its resistance of 50 & 200 Day Averages on strong volume.
So, conventional wisdom on Intermarket Analysis suggests there might be further headway left for Gold (CMP: $1248/oz). The last bottom on daily chart was made at $1220 regions & this should hold in future if the uptrend has to continue. Hence, this view will remain valid as long as Gold keeps above this $1220 mark. On the reward side, we see the immediate target to $1300 regions because that was the last higher top & prices must surpass this level & go beyond for the uptrend to continue.
