The Shanghai-SPX Relationship and Charts of the Week

By: Mike_Paulenoff

The first chart I will explore today is the relationship between gold and oil and the dollar. The daily chart of spot gold versus spot euro/dollar shows a normal relationship, at least at first glance, with gold and the euro, as priced in dollars, moving in the same direction.

Gold has undergone a serious correction from its December high at 1227 to its February low at 1044, while the euro has been going down the entire time. What is interesting about this chart is that the trendline in gold was broken right around 1095-1100. Gold made its low on Feb 5, and then took off to about 1130 in the last three weeks and continues to go up. But the euro has been going down (stronger dollar).

Gold and the euro going opposite ways of late is a very strange relationship. I have to think that gold is sending us some sort of message that there’s a reason why the market wants to accumulate gold even while the dollar is not friendly toward gold at the moment.

That said, though, let's notice what happened on Friday. The euro actually reversed to the upside after hitting a multi-month low in the morning session of 134.40 and closed at 136.13, which was above Thursday's close at 135.30.

Still, the euro is very oversold. We also know this by the way the relative strength or momentum indicator is acting. The chart shows a number of new lows for the euro over the past month, where during the same time momentum made a higher low.

At the same time, gold was consolidating at a relatively high level at 1100–1130 all week last week and is above the break of the trend line that occurred on February 16. Gold had an upleg, is consolidating, and appears ready to take off again -- good news for holders of the SPDR Gold Shares ETF (NYSE: GLD).

Normally, when the euro gets hit so hard that it drops below its 200- 50- and 20- day exponential moving averages, usually gold will look the same way. Gold, however, didn’t follow suit this time. Instead, on February 5, gold hit a low right at its rising 200-day and didn't break it, rallied from it, and is now consolidating above both its 20- and 50-day.

So the chart is telling us that something is going on in gold that could be extremely positive, and something going on in the euro that could stabilize it for a while, which could be very positive for gold. The likelihood gold could take off is enhanced by the fact that the euro may be turning up for a relief rally.

What would cause a relief rally? I've been reading that the Greeks are coming to the market with a bond auction this week, which will be a litmus test to see if that bond can be sold or if there is any demand for the bond or any confidence at all in the Greek financial fiscal monetary situation and in the Greek government itself.

Any positive news could lift the euro, which looks ripe for a recovery rally that could get to 140. With it currently trading at 136, then we're talking about a rally of 3 percent. In turn, gold could move more sharply, towards to its December high above 1200.

As far as the euro's rally is concerned, I don't want to be long right here. I think there are probably issues behind the Greek situation that will preclude the euro from going into a bull move anytime soon. If anything after a brief rally it will go into a sideways stabilization pattern and roll over again.

To put an exclamation point on gold, let's look at oil, which has been going up at even a faster rate than gold. While gold bottomed on Feb 5 and has gone up 8 percent, oil also bottomed that same day at 69.86 and hit a high on Friday at 80 and change, which is around a 15 percent high.

At the same time the dollar has been going up as well. It's very strange but unique to see gold, oil, and the dollar going up at the same time. When gold and oil are going up in tandem it can mean several things, usually related to geopolitics. Oil could be headed back up toward its October and January highs at 82-84, which should interest holders of the US Oil Fund ETF (NYSE: USO), and gold is probably heading higher as well, possibly to 1160 and maybe 1200.

Now, maybe for the next week to 10 days, the euro if the technicals are right should stabilize and actually be friendly to gold and oil -- as opposed to unfriendly.

In the rest of our video chart analysis this week we look at the relationship between the Shanghai Composite Index and the S&P 500. The chart shows relative the relative health of the SPX to be much better than that of the Shanghai market as we entered the first session tonight in a week for Shanghai.

More on the Shanghai-SPX relationship available in our video.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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