Since the Basic Materials sector is breaking out I would like to take an in-depth look at some of the stocks that make up the Basic Materials sector along with some commodities in general. Most commodities have had a tough go of it since they topped out in 2011, but there are some signs that they may be bottoming, which could lead to a substantial rally over the intermediate to the long term. As you will see some of the bottoming formations are very symmetrical while others are pretty ugly, but as long as they can make a higher high and higher low an uptrend is in place.

Lets start with the CRB index which built out a one year bearish rising wedge formation that broke to the downside in March of this year. The price action has been chopping to the downside and has gotten a bounce to the upside in late June. Normally the price objective of a rising wedge is down to the first reversal point where the pattern started to build out.

There is another pattern I’ve been keeping a close eye on which may have given us a good clue today that we may have a consolidation pattern building out which is forming above the January 2016 low. As you can see on this long term daily chart for the CRB index it has built out a sideways trading range which broke to the downside last month, which wasn’t a bullish development if one was bullish on this index.

Expanding patterns, whether they’re a triangle, flat top or flat bottom, expanding falling wedges or expanding rising wedges, are some of the more difficult formations to find in real time. The reason being is that with the pattern on this daily chart below shows a false breakout below the bottom rail, blue horizontal dashed line, which looks like a breakout to the downside. With today’s price action closing back above the blue dashed line we now have a potential flat top expanding triangle. If the price actions can close above the top horizontal trendline, the flat top triangle will be the first consolidation pattern in the CRB’s index’s new bull market.

This 75 year quarterly chart for the CRB index shows you just just how bad the bear market has been. To really get this index bullish again I would love to see the price action trading back above the brown shaded S&R zone above 200 or so, which would create an unbalanced double bottom. By looking at the daily chart above you can see how the unbalanced double bottom would look like if the top rail of the expanding flat top triangle is broken to the upside. If the possible unbalanced double bottom plays out we are just in the first inning of a 9 inning game.

This next commodities chart is a long term monthly look at the DBC which is much more actively traded than the CRB index. Instead of an expanding flat top triangle the DBC is building out a possible flat bottom triangle. Again, this potential pattern has a chance to be a consolidation pattern to the upside if it can take out the top rail. No matter how you look at the current price action there is still a lot of work to do before we get any type of resolution to the trading range. A break below the bottom rail will ensure a move back down to the previous low and on the other hand, a breakout above the top rail will put the bull market thesis into play.

Next I would like to focus in on the XLB, basic materials index, which is made up of many large cap stocks. The last time I did an in depth report on the XLB, I suggested this index should do very well as long as its top 5 components were doing well.

Now lets take a look a daily chart for the XLB, basic materials index, which is showing it has just broken out of a 6 month blue expanding flat bottom triangle with a small H&S bottom that formed as the backtest. Today this basic materials index closed at a new all time high.

Below is a 4 year weekly bar chart that is showing the breakout from the 6 point flat bottom triangle consolidation pattern into new all time highs this week.

The long term monthly chart for the XLB shows its entire history and its bull market uptrend channel. If the 6 point expanding flat bottom triangle is breaking out topside then the original top rail of the major uptrend channel will be taken out. Generally when that happens you can see another equal channel higher giving the uptrend 3 equal channels instead of two. The black rectangles shows how this new uptrend may play out.

This next chart is a long term monthly chart for the XLF which I’ve been showing you how the lower channel may be morphing into a double uptrend channel with equal lower and upper channels. This is the same principle as the XLB chart above which is forming a possible third channel.

This last chart for the XLB is a monthly line chart going back 20 years. The reason the XLB looks so good is because it’s made up of many very big large cap stocks that we’ll look at in a moment.

Next lets look at the XME, metals and  mining etf, which broke out of a double H&S bottom last fall and has recently been backtesting the neckline forming the blue falling wedge as the backtest. Last week the price action finally closed above the 30 week ema.

The first 5 stocks that make up the XLB account for nearly 45% of this index. For 2 years the DOW, Dow Chemical, built out an expanding triangle that broke out to the upside about 8 months ago, and is currently trading at a new all time high. It has the highest weighting at 12.1%

Next is DD, DuPont, which has broken out of a bullish rising wedge which makes up 11.9% of the XLB and is also trading at a new all time high.

Below is a monthly chart for MON, Monsanto, which is just completing the 4th reversal point in a massive 10 year triangle trading range. It has a weighting of 9% in the XLB.

Number 4 on the list is PX, Praxair, which is still trading inside of its bull market uptrend channel that began to form way back at the 2000 low. It has a weighting of 5.9% and is trading close to new all time highs.

PPG. PPG industries, is 5th on the list and is trading close to new all time highs building out a very large triangle consolidation pattern. It has a weighting of 4.8%.

In part 2 of this report we’ll look at some of the different commodities and stocks within those commodities which are all over the place at the moment with some showing strength while other as still showing weakness. At some point if the bull market really takes off we should see the whole complex moving up together with all areas enjoying their own individual bull markets. One step at a time. All the best…Rambus

While most members are focused on the precious metals ,I’ve been waiting patiently for  two other sectors to setup a long term buy signal which I believe happened last week. I know you are well aware of my mantra that big consolidation patterns lead to big impulse moves. What’s pretty amazing is these 2 sectors have an almost identical  long term consolidation pattern and are breaking out at the same time. It stands to reason that if the Emerging Markets are going to be strong then the Basic Materials sector should benefit as well.

Most like to look at the EEM, emerging market index, but there is another emerging market index which trades with much more volume, VWO which I will use in this post. Lets start with just a simple daily line chart for VWO which shows a H&S bottom in place and a breakout yesterday of the blue bullish rising flag. Keep those two patterns in the back of  your mind when we look at the longer term charts.

Below is a 5 year weekly bar chart which shows a double H&S bottom with the breakout of the blue bullish rising flag yesterday, which has formed just below the important overhead resistance zone. There are 2 things the blue bullish rising flag is suggesting, First these types of patterns form in strong moves and secondly it is forming just below important overhead resistance. We’ve studied this setup many times in the past which states, when you have a small consolidation pattern form just below important overhead resistance, it usually leads to a breakout. The small consolidation pattern builds up the energy needed for the final breakout move.

Now I would like to show you the long term weekly chart for the VWO so you can see the 6 year rectangle consolidation pattern that has been building out. Note how the blue bullish rising flag has formed just below that 6 year top rail of the rectangle consolidation pattern. If there was ever a place to see one of these types of bullish patterns buildout this is it.

As you can see on the weekly chart above the breakout hasn’t actually happened yet. Most chartists don’t like to use line charts, but they can be a very useful tool for the toolbox. Another lesson I’ve shown you in the past is how a line chart can often times signal a breakout before a bar chart. Keep in mind a line chart just uses the closing price whether it be a daily, weekly or monthly chart. Below is a monthly line chart which shows the breakout taking place. A backtest would come in around the 40.70 area on a monthly closing basis. The bottom line is that we want to see the price action close the month of July above the top rail.

This last chart for VWO is a 20 year look which shows its entire history. With this weeks move, the all important 4th reversal point was achieved when the top rail was hit which completes the trading range. It now becomes very important to see a strong breakout move higher leaving no doubt that the breakout is for real. A failure at the top rail would then start another reversal point to the downside which is not what we want to see.

If the breakout move continues then I would view the nearly 6 year trading range as a halfway pattern as shown by the blue arrows. I would expect we would see a similar impulse move up that began at the 2009 crash low up to the 2011 high in time and price. Big consolidation patterns lead to big moves.

Now lets take a look a daily chart for the XLB, basic materials index, which is showing it has just broken out 6 of a month blue expanding flat bottom triangle with a small H&S that formed as the backtest. Yesterday this basic materials index closed at a new all time high.

What are Basic Materials and what components are in the XLB ?

http://www.etfinvestmentoutlook.com/etf_holdings.php?s=XLB

Below is a 4 year weekly bar chart that is showing the breakout from the 6 point flat bottom triangle consolidation pattern into new all time highs this past week.

The long term monthly chart for the XLB shows its entire history and its bull market uptrend channel. If the 6 point expanding flat bottom triangle is breaking out topside then the original top rail of the major uptrend channel will be taken out. Generally when that happens you can see another equal channel higher giving the uptrend 3 equal channels instead of two. The black rectangles shows how this new uptrend may play out.

This next chart is a long term monthly chart for the XLF which I’ve been showing you how the lower channel may be morphing into a double uptrend channel with equal lower and upper channels. This is the same principle as the XLB chart above which is forming a possible third channel.

Below is a daily chart for the UYM, 2 X long the basic materials sector, which has just broken out from an almost 6 month expanding triangle consolidation pattern last Friday.

The long term monthly chart for the XLB shows a very similar setup to the long term chart we looked at earlier on the VWO, emerging markets etf. With the expanding triangle we just looked at on the daily chart above breaking out, then the price action should also breakout above the top rail of the 6 year bullish rising flag consolidation pattern.

This last chart for tonight is a weekly line chart which is showing the potential breakout underway. What the emerging markets and basic materials sectors are strongly suggesting  is that there is a big move coming which has global implications for growth even if we can’t rationalize why at this point in time. We should see a very strong rally over the next 2 years or so equal to the rally out of the 2009 low to the 2011 high. Have a great weekend. All the best…Rambus

A Lot of members ( and Outsiders) are expressing disbelief ,and of course, some goldbugs  outright ridicule, for Rambus Weekend Report with very dire “potential” prices for Gold and the prediction that the Dow et al will Outperform Gold for a long time going forward.

GOLD INTERESTING POTENTIAL TARGETS  https://rambus1.com/2017/07/09/weekend-report-135/

Personally I understand why these charts and what they are implying can be very disturbing to Gold Investors …BUT I have found by experience that dismissing Rambus Long term Charts and Analysis out of hand is usually a Big Mistake.

Here are some examples of other LONG TERM calls that were ridiculed and dismissed as coming from a lunatic.

Note the links to the complete posts are provided but for those too busy to read them  all , the key chart from these posts is just below the link.

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THE JAWS OF LIFE : October 2014

There seems to be a lot of confusion out there as to whether the stock markets are bullish or bearish. Is the Dow Jones in a topping pattern as so many analysis are suggesting? I’ve seen some charts that are calling the big trading range , on the Dow Jones going all the way back to the 2000 bull market top, THE JAWS OF DEATH. Man it doesn’t get anymore dire than that. As usual I have a different take on the JAWS OF DEATH, which I would like to share with you  tonight .

Before we look at the first chart for the Dow Jones I need you to clear your mind of everything related to the stock markets in any shape or form. That means no Elliot Wave counts, Time Cycles, Gann Lines , volume studies, no indicators of any kind. Clear your mind of every article you’ve ever read on the stock markets, bullish or bearish. And last of all, NO CHARTOLOGY. I want you to look at just the pure price action without any bias whatsoever. From that point we can then start to see what is really happening to the Dow Jones and related markets .

https://rambus1.com/2014/11/19/wednesday-report-49/

So…here is what happened…The call was made at the end of 2014…after that 2015 saw 2 hard back tests to the top jaw and then since 2016 a big rally has ensued. it would be easy to have given up on this call but that top line ultimately held.

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US DOLLAR BEARS PREPARE TO HIBERNATE MARCH 2013

https://rambus1.com/2013/03/10/dollar-bears-about-to-go-into-hibernation/

Here is what happened next :

After 15 more months of going sideways to down , The dollar suddenly took of in a strong impulse move. from 80 to 100. (Rambus still hasn’t given up on the idea this consolidation is a halfway pattern ) TBD.

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PRECIOUS METALS STOCKS TOO BIG TO FAIL : FEBRUARY 2013

https://rambus1.com/2013/02/22/precious-metals-stocks-too-big-to-fail/

What happened next ?

HUI failed and fell to 100 before recovering

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Here is a Call on Silver (via SLV) that I couldn’t believe at the time .”SLV BLUE DIAMOND” January 2013

Followed soon after by “SLV RED DIAMOND” November 2013

And then: Look at those POs

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One More :

BLACK FRIDAY IN THE ENERGY MARKETS is a compilation of a long term call made initially September 2014..The Compilation follows the evolution of this thread which was posted as Friday Nite Late Charts…

https://rambus1.com/2014/11/29/friday-night-charts-21/

And then

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So: as I started to say. After seeing all these Long term calls. You would agree that discounting Rambus long term work can be hazardous to your financial health.Since these are long term , as you have seen , they do take time and twists and tradable turns to fulfill however.

No guarantees of course but the track record for long term is pretty good eh ?

Fullgoldcrown

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WHAT IF GOLD HAS A DROP DEAD LINE ? January 2 2017

Now I would like to start showing you the very big picture which begins to bring all the pieces of the puzzle together. This first weekly bar chart for gold shows the potential massive double H&S top with the 1100 area being the most important price point for gold at neckline #2. If neckline #2 gives way the price objective will be down to the 500 area, which seems impossible at this time, but big patterns create big moves. Note the multi year base made back in the late 1990’s which launched gold’s bull market that took over five years to build out.

There was an important development this week in the stock markets that few picked up on. This week the Transportation Averaged closed at a new all time high confirming the bull market is still alive. For the last 7 months or so the Transportation Average has been building out an expanding triangle trading range. The price action still hasn’t broken out above the top rail yet, but if it does I would view the expanding triangle as a halfway pattern to the upside. Keep in mind you have to have a consolidation pattern to get an impulse move as you can see from all the other consolidation patterns starting at the last reversal point.

As you can see on this weekly chart the Transportation Average is a good producer of some really nice chart patterns as shown by all the blue formations. The H&S bottom was also very symmetrical as shown by the neckline symmetry line. Durning the strong move up back in 2013 and 2014 the Transportation Average formed 2 bullish rising wedges which told us that the bull market was very strong. When that leg of the bull market ended in early 2015 the Transportation average built out the 5 point bearish falling wedge reversal pattern.

The 20 year monthly chart shows a massive symmetrical H&S bottom which launched our current bull market with the head forming at the 2009 crash low. I’ve shown you many times that when there is overhead resistance many times you’ll see a consolidation pattern form just below that important resistance zone. Note the red triangle that formed just below the neckline which led to the breakout and the strong impulse move up.

Below is a 100 year quarterly chart which puts the 2009 H&S consolidation pattern in perspective. After 100 years of trading the Transportation Average is trading at the highest level in history which is confirming the bull market in the INDU. Without one you can’t have the other so as long as both are making new all time highs it is what it is until it isn’t. Have a great weekend. All the best…Rambus

Today is called a recognition day when it finally becomes apparent that  the trading range is ending and you have a massive breakout move. We can still get a backtest to the breakout point which would  represent the 2nd area to take a position. Today GLD gapped below the H&S backtest to the bottom rail of the black bearish rising wedge and that very important S&R line which last week I said came into play around the 117 area.

GLD weekly chart:

GLD’s monthly 2011 bear market downtrend channel.

Just a note to check Plungers Posts at the Forum. Some very interesting developments worth your while.

(Link to the forum is on the top right here)

Remember Forum access is free with your subscription. it is a separate log in and for most a separate password.

FGC

gmag@live.ca

It’s been awhile since we last looked at this combo chart which has the TLT on top and GLD on the bottom. Earlier this year I was showing you a possible H&S top on TLT, but the breakout below the neckline never materialized because of the big gap at the 128 area. I was showing the right shoulder as a possible bearish expanding rising wedge. Last week the price action gapped above the top rail and the neckline symmetry line when it closed the gap.Today’s move down has created an island reversal just above the top rail of the expanding rising wedge. A move back below the top rail of the expanding rising wedge will show a bull trap and possibly the high for the right shoulder.

I would like to put out a short update on the oil market and my view of the QQQs being a proxy for the Hi-Tech end of the market.   With the hard sell off in the oil market of this week  this would seem a logical place to give it a rest and for a short seller to step over to the sidelines for a while.  Anytime the market has gotten itself to this level of being oversold we have seen a rip to the upside.

One of the keys to being a successful short seller is to know when its time to press ones bet.  Extended moves to the downside come from oversold levels and I am going to show you why I believe we may have further to go to the downside before this current move is over.

You should recall we executed our first short position in oil in the beginning of March just prior to oil falling out of the descending triangle .  Keep in mind the dynamics of a descending triangle is where the ceiling of supply gets lower as time progresses.  Each time price rises it meets selling at a lower level.  Note below once the triangle got established the higher volume bars were red indicating sales volume.  This was an in-your-face bearish announcement to anyone who cared to listen.  But typically not many care to listen to the language of the market… so they were “surprised”.

Looking a the chart above I have described it as a super-ball bouncing down the stairs.  When a ball is rolled down the stairs the amplitude of the bounces increase with each progressive bounce.  The reason for this of course is potential energy is being converted into kinetic energy.  We see this dynamic in the chart above.  This is not just a coincident metaphor, but a market principle in energy dynamics.  Recall how the oil price stayed in a bounded channel for 24 years between $10-$40 from 1980-2004. During that time it was coiling energy so when it finally broke out it had the propulsive power to run to $147 over the next 3 years.  These physical dynamic images are useful in understanding markets.  So what that means for us now is this market still has downward energy in it.  The second bounce we saw occurring in the month of May was strictly based on OPEC-hype narrative.   It immediately fell apart after the OPEC meeting.

Here is what this move looks like within the the bigger picture of the entire bounce off the lows of Jan 2016.  We see how we built out a H&S right on the lower boundary of the rising wedge—Classic.  Also note how RSI, although low does not limit a move further to the downside.  Stochastics are flatlined on the bottom NOT showing any case for an immediate  upward move.  MACD Histograms also do not have a pulse.  Bottom-line there is not yet any sign of a bounce taking hold in this chart.

The OPEC Narrative

I understand this site focuses on the charts and not the narrative, however I believe its useful to have knowledge of what’s going on behind the scenes.  Besides, that’s how Plunger rolls when it comes to how I construct trades.  You must know that Saudi Aramco is positioning itself for a major IPO of its assets.  Recall that an IPO is how insiders cash out of a market and “unload” their assets onto the public.  This deal is in the works.  It is estimated that this will be the biggest IPO in history.  Valuations are in the $2 Trillion neighborhood.  Obviously, the higher the oil price the bigger the IPO, so we can see how imperative it is for the Saudi’s to keep the oil price up.

But here is the problem, the Saudi narrative has now developed into “the boy who cried wolf”.  Their public efforts of managing supply to elevate price have been entirely discredited by the market.  Cutting supply simply cedes market share in the world of financialized oil hedging contracts.  Stated differently, all OPEC jawboning narratives are now shot.

ECON 101- Ingredients to a bull market

Now I have a question for you:  Where is the chapter in your Econ 101 textbook which describes that a bull market can be based on decreasing supply?  I must have been asleep in class on that day because I don’t remember that one.  (Actually Econ 101 is nothing more than Keynesian indoctrination of course, where the only worthwhile thing taught is supply/demand curves… but I digress).   But my point is that a bull market must be driven by increased demand.  Supply typically rises along with the trend of higher prices.  So what has occurred over the past 16 months is the market has been artificially moved higher without any rebalancing of supply and demand.  Therefore this market is now currently out of balance.

This is simply a way to highlight that the entire structure of the oil market is an engineered facade. The free market eventually tears down facades, which is what I believe we are witnessing before our eyes right now.  The CBs of the world offer virtually free money which funds the frackers.  Saudi cuts back market share and ramps prices to $55 where the frackers hedge future production.  The frackers can now pump increasing amounts without regard to the oil price for 12-18 months.  Its a recipe for an oil crash.

Volume Dynamics

Now this is where us Chatologists have an advantage.  The charts reveal something is up.  Rambus has often taught the principle of Symmetry.  Stated differently, the way the market goes up is the way it goes down and vice versa.  Volume analysis is a similar concept.  It’s what those volume-by-price bars are for on the left side of the chart.  If there is little to no volume in a price range then there is little support or resistance.  As a result price tends to move rapidly through these zones.  Well that’s what we have with the oil chart.  Below I put the volume-by-price bars onto our bearish rising wedge chart and we can see a zone between $34-$41 having very thin volume.  So breaching $41 unlocks overhead supply from any supporting structure which can hold it up.  There is a possibility that we could witness a flash crash in the oil market from these levels down to as low as $34.

Another very important clue to future price dynamics can been seen by looking at the internal structure of this bearish rising wedge.  Take a step back and notice how ALL of the bottoms in the chart above are sharp V-bottoms.  I don’t have to tell you that V-bottoms are not the ingredients to a sustained move.  V-bottoms cry out to be tested and are not foundational.  Folks what we see above is a picture of a developing crash.

Here is another view from Alastair Williams’ twitter feed showing the long term volume nodes which on his chart show overhead supply becoming un-locked at $42.

Pivot Point Support

Pivot points can be helpful to indicate where possible support can come into play.  Here we show an S-1 at 40.32 and S-2 at 37.62.  I regard pivot point analysis as marginal assistance however it is one additional data point to be aware of.

What could go wrong

So what could de-rail this path toward Sub-$40 prices?  Plenty of course.  OPEC is in the false narrative business, so any engineered event could derail this move temporarily.  A supply disruption scare would be the principle method of boosting the price and there are plenty of ways to engineer that over the short term.  OPEC jawboning is obviously futile at this point which explains why OPEC was so silent this week.

So I am staying the course, I see the opportunity for a downward acceleration, however there is always the risk of a short covering rally for traders.

QQQ Update.

I have made my short term bearish case for the QQQ’s in the past 2 weekly reports.  I think the US market is set-up for a crack.  The bull market may not be over as conditions allow for another run to higher highs after a shake-out, but for now we’re walking on eggshells.

First off, Rambus has made it clear that there is still no resolution in the QQQ.  We  have bounced off the NL of a potential H&S pattern therefore no sell signal from a price perspective has been triggered.  As mentioned however, sometimes I get out a bit further on my skis and this is a case of this.  So with a note of caution, I would like to show you what I am seeing.

Below we see a 4-year weekly view of the QQQ.   It shows a powerful move upward where it underwent a mid-course triangle consolidation.  The move was so powerful that we see how it morphed from a horizontal triangle into an ascending triangle.  That was a big clue of what was to come.  After the breakout we see a mania-power-run leaving tiny volume-by-price bars in its trail.  It went on to top (for now) at a weekly RSI of 81.06.   This is simply extraordinary.  We then put in a volume spike-outside reversal to the downside associated with an upside exhaustion.  I mentioned earlier that this has not occurred since March 2000 at the peak of THAT mania.  So I see the potential for a downside crack in the market right here.  Call it the shakeout before the breakout.

Let’s dive in a little deeper and examine the internals which shows what I am seeing.  Below   is how I interpret the price action.  It’s all pretty classic and consistent with bounce dynamics.  We see bearish rising wedges all over.  In the RSI and price action it looks like a dead cat bounce (DCB).  Volume decay supports this view as there is no longer enough interest to support a higher move to a new high for now.  If the NL is broken we see a MM down to 131.5.  All pretty vanilla standard interpretation.

On Balance Volume

So now let’s give a bit more deeper insight: Volume analysis.  Joe Granville, the great one, gave us his on balance volume (OBV).  He had an epiphany and saw it one day as a valuable way to view volume accumulated. In a similar fashion Dick Arms one day walked into the stock exchange, looked at the board and it struck him…the “Arm’s Index” was created. (look it up).  It just hit him.  So OBV is a running summation of up minus down volume.  A simple concept actually, easy to see how its a great measure of bull vs bear internal action.  If the market is moving up it would make sense that there is more up vs down volume.  If not, something is obviously wrong.  Which by the way was another Granville truism: “What is obvious, is obviously wrong”

So here we see OBV with the red line over price.  Talk about obvious… there is something wrong here, price has risen on declining OBV.  This is called a divergence.  I would say its announcing this bounce is built on borrowed time:

Momentum

Let’s now get the “feel” of momentum.   Step back a bit and look at this chart from a distance.  RSI is a level of overbought and oversold.  It also expresses momentum. I have superimposed RSI on top of price to drive home my point.  Put yourself in a car riding up the price bars while observing the RSI peaks.  Get the feel of how the movement upward is starting to feel exhausted. Note how the last peak just couldn’t get that RSI level up there anymore.  Furthermore, this recent dead cat bounce virtually just sat there.  Now look down at the MACD histograms, they  can’t even get above zero…Stochastics are substandard as well.  This paints a confirming picture of exhaustion.

Mr. Fibonacci sez Prego….almost

We have virtually a perfect 61% retracement of the move down:

The Hindenburg Omen

The Hindenburg Omen (HO) does not mandate any specific outcome to happen, but its a statistical data point that gives us insight to a forward path.  We just registered a confirming second HO this week.  There has never been a crash without a HO.

Here are the statistics over the past 29 years after a confirmed HO:

24%- Major Crash

39% chance 10-15% decline

54% chance 8-10% decline

77% chance 5-8% decline

92% chance 2-5% decline

7% chance of a total miss

So I just wanted to present to you some analysis of these two markets.  I certainly don’t “know” what happens next, but you should be familiar with these potential outcomes.

Tonight I would like to update a few ratio combo charts as several are at a crossroad, which may shed some light on where the PM complex may be headed next. A couple of the ratio combo charts worked out extremely well in calling a bottom in January of 2016.

Lets start with the TLT:TIP ratio combo chart we looked at recently which shows if we’re experiencing inflation or deflation. When the ratio in black is falling it’s showing deflation and when it’s rising it’s showing inflation. From the 2011 high the general trend has been for deflation. About a year ago you can see the black ratio was rising in a pretty strong move up, but late last year and the first part of this year the ratio topped out and has begun to fall. The red arrows shows how the ratio is reversing symmetry down over the same area on the way up. For the time being there isn’t much in the way of support.

At the bottom of the chart I added the CRB index and the GDX which also topped out in 2011 and have been trending down with the black ratio. If the TLT:TIP ratio keeps falling, will the CRB and GDX keep performing in a similar manner as they have since their 2011 bear market highs? The 30 week ema is the first line of resistance they will need to overcome followed by the top rail of the 2011 bear market downtrend channel.

This next ratio combo chart compares gold to the XAU on top with the XAU on the bottom. Long term members are familiar with this chart, but for the new members I’ll give you a quick rundown. For many years when the ratio chart on top would get down to the 3.70 area it was a good time to sell your pm stocks, red arrows, and when the ratio got up to the 5.10 area it was a good time to buy your favorite PM stocks.

All that changed dramatically during the 2008 crash in the PM complex when the ratio made a new all time high above 6.00 for the first time in history. That new high for the ratio above 6.00 told us just how weak the PM stocks were to the price of gold. Little did I know back in 2008 that the under performance of the PM stocks to gold would continue until January of 2016. That little double top in 2016, yellow shaded area, was the first clue that the ratio may be topping out. When the price action broke below the double top hump that was the beginning of the January to August 2016 rally in the XAU. I suggested at the time that the rally could be very strong because the 20 year, 6 point parabolic arc, was finally giving way. Normally when a parabolic move ends you can have a big move equal to or greater than the parabolic move in the opposite direction.

I was initially looking for support at the brown shaded S&R zone, but the ratio declined all the way down to 12.50 before it finally found support. After the ratio bounced at 12.50 I drew in the possible H&S top looking for a right shoulder to form in the brown shaded area. That has happened, but now the ratio is testing the upper limits of the brown shaded S&R zone. The bulls want to see this ratio declining as it suggests that the PM stocks are out performing gold which is what you want to see in a bull market. The XAU chart on the bottom shows how it began its 2016 rally at the exact same time the ratio broke down from the double top.

This next ratio combo chart is a weekly line chart which compares gold to the XAU on top with the XAU on the bottom, which gives us a close up view of the possible H&S top on the ratio chart. When I first built these charts the possible right shoulders were still pretty small in relation to the left shoulders so I added the black arrows looking for some symmetry. As you can see, if the H&S patterns are going to play out we need to see the ratio chart on top start to break down as it’s testing the upper limits of the right shoulder, while at the same time we should see the XAU putting in its low for the right shoulder. These potential H&S patterns are 4 1/2 years in the making so if the XAU can take out the neckline there will be a very large base in which to launch a new bull market. On the other hand if we see the ratio rally much higher than where it is now the odds favor a continuation of the bear market.

Below is another ratio combo chart which compares TLT to gld on top with gld on the bottom. When the ratio is rising gld is generally falling and vice versa. The ratio has a pretty strong inverse correlation with gold. On the left hand side of the chart you can see the ratio built out a H&S top while gld built out an inverse H&S bottom at the 2008 crash low. Then in 2011 you can see where gold topped out and the ratio bottomed out which was the start of the bear market for gold as shown by the red arrows.

The ratio chart gave us a very clear and early buy signal back in January of 2016. The ratio was building out a rising wedge formation which ended up having 7 reversal points making it a bearish rising wedge. When the price action broke below the bottom rail of the rising wedge a buy signal was given which coincided with the small double top on the Gold to XAU ratio chart we looked at earlier.

Some of you may have already noticed that the ratio chart on top has formed a 15 month falling wedge which has broken out topside while gld on the bottom chart is finding resistance at the top rail of a possible triangle. The heavy black dashed trendlines shows the 2011 bull market in the ratio chart and the bear market in gld. The ratio chart on top is strongly suggesting that the bear market might not be over for gold  if the breakout continues to hold. Again it’s time for the PM bulls to step up to the plate and show us they mean business. I would love for nothing better than to see the PM sector in a bull market again. All the best…Rambus