This week Sir rlscott63 is interested in the gold to silver ratio and how it plays into the movement of the stock markets.

First, we’ll start with the gold to silver ratio that can tell a very important story if one interprets the information correctly. The general theme of this ratio is when gold is outperforming silver the stock markets are generally declining and the ratio is rising. Just the opposite happens when the ratio is falling meaning silver is out preforming gold and the ratio trends downward. What it means when the ratio is falling is that silver is outperforming gold signaling to the stock markets that its time to rally as silver is still used as an industrial metal and the demand from a robust economy is putting a higher demand on the white metal vs when the economy is weak. This is why you see the ratio falling during rising stock markets.  I built a chart four or five years ago that shows a very clear picture of how the ratio rises while the stock markets fall and falls when the markets rises. The chart below is a combo chart with the SPX on top and the gold to silver ratio on the bottom. You can see the general principal, I described above, at work on the chart. Notice when the ratio is falling the stock market is rallying and when the ratio is rising the stock markets are falling. Note the 2011 period when the gold to silver ratio plunged below the horizontal support rail at 49 or so. That’s when silver was in it’s near parabolic rise to 50 and was kicking golds butt all over the place. You can see the stock market was rallying hard and was at it’s high while the gold to silver ratio was extremely low at 34 not seen in a very long time. From that extremely low reading of 34 the ratio started to rise and the stock markets had their summer correction finally bottoming out in the fall. Note the steep rally in the gold to silver ratio during the stock market crash in 2008 labeled deflation scare. Even though gold fall hard silver fell much faster as investors were seeking the safety of gold over silver. Gold has been outperforming silver since the low in the stock market last fall and the raito has broken back above the horizontal rail at 49. This is a bit of a divergence as both the stock market and the ratio have been rising together just a tad. So its very interesting right now as the ratio is just about to break above it’s little downtrend rail that will signal a weaker stock market and once we see the SPX break below it’s uptrend rail that should signal the stock markets going back into it’s secular bear market. I’ll be watching this chart very carefully for more clues for a declining stock market and an out performance of gold over silver.

This morning I got an e mail from a subscriber that asked several important question regarding the HUI and the precious metals stocks. First, he wants to know if the big H&S price objective down to the 360 area is still valid?  Yes, the 360 is our real first area of key support as it’s the big H&S price objective, at a minimum. There is also a low made back in February of 2010 that should give us some initial support.

Next he would like to know if we hit the H&S price objective down at the 360 area would it be a good place to accumulate precious metals stocks? First of all this is a huge H&S top that is a reversal pattern, reversing the uptrend made off the 2008 crash lows. This is a massive top formation that is going to take time and lower prices to put in a lasting bottom. The topping pattern is about 18 months or so in the making. We are now only several months into the correction. A rule of thumb is the larger a top, bottom or consolidation pattern is the longer the move will be in time and price. If our current H&S top only took several months to complete we would be in a completely different ball game. I would not be looking for a major reversal like I see happening with our present H&S top. So the answer to your question would be the 360 area may offer us a decent counter trend trade against the big downtrend that is in play right now but not for accumulating precious metals stocks for the long term IMHO. What we are seeing today is a short covering rally that will get everyone excited again.

The last question he asked, which is very important to each individual investor is, should I sell my core holdings? That’s a hard question to answer because each individual investor has a different psychological profile. Some can’t stand the least bit of pain while other investors can ride a correction out and not bat an eyelash. As I’ve mentioned several times I’m not holding any precious metals stocks at this time. This is my preference. Many of you may recall the big bull market in the 90’s that had many analysis saying the Dow would go to 25,000 based on this or that and that a new  paradyme was underway. Its really hard not to get caught up in all the hype when so many are talking the same thing. Nobody knows for sure if this bull market is over for the precious metals complex or that we still have several thousands of dollars to go yet for gold. I can’t prove it because I didn’t trade the gold bull market in the 70’s but I bet the fever was high and most analysis didn’t even come close to selling out at the 850 top because gold was going to 1000 or 1500 or whatever price anybody wanted to put on it. That is how the tech bubbled ended with everyone looking for much higher prices. Very few got out at the top. I was lucky because I could read a chart and seen what was happening but my broker, at the time, rode the whole thing down because buy and hold is the only thing most investors know. So all I can tell you is that we have a major top in place and how low we go is anybodies guess at this time. When I seen the H&S top pattern in 2008, on the HUI, I had no idea of the magnitude of the crash that was to follow. All I knew was we had a H&S top in place and it was reversing the uptrend that had been in place since the beginning of the bull market. We tripled the H&S price objective before the HUI found its bottom. As I said before we are going to get some short covering rallies that will knock your socks off but they will be against the downtrend that is now in place. Holding a core portfolio of PM stocks has to be a personal choice. A choice based on your own knowledge and personal make up. My first rule of thumb is to protect ones hard earned capital. If I sell out too early and the markets go against me I’m not afraid to buy in higher as its better to buy in higher than to be caught in a downdraft that you can’t get out of. I hope I’ve answered your questions.

HUI daily line chart.

HUI monthly with the 2008 H&S top.

Below is a snap shot of the 2008 H&S top on the HUI. That top took 11 months to complete and four months after the breakout to reach it’s final low at 148. You can see two consolidation patterns that formed on the way down the little red bear flag and the much bigger bearish falling wedge. Once I was able to identify the big blue bearish falling wedge I was then able to put a price target for that move down. Note points one and two on the bearish falling wedge. That counter trend rally was just over 100 pts. Put yourself in that time frame and how would you have reacted at the time. I can tell you from experience its very very hard not to get insecure about your position but knowing the major trend was down made it easier to ride the counter move up. In our current situation we have had a big move down and a counter trend rally or short covering rally can come out of the blue but knowing that the main trend is down should give one confidence to ride the move out.

HUI 2008 H&S top.

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Below is an updated chart of the gold chart I promised you. I don’t see a gap but it definitely broke the bottom rail of the rectangle and also the all important 300 dma.  The bottom of the rectangle will now act as resistance on any backtest at 1626. Notice how long today’s bar is vs the ones inside the rectangle consolidation. That’s what I like to see on a breakout, a nice long bar.

The chart below shows the 10 year bull market for gold and the 300 dma. You can see how impressive the 300 dma has been. Today’s move is out of character for the 300 dma and one should pay close attention to what it maybe saying.

Finally, after the euro broke the big neckline back at the end of 2011 it now looks like the backtesting in complete. The backtesting process took on the shape of a H&S consolidation pattern. Today we are breaking the neckline. I hope everyone can see how all the pieces of the big jigsaw puzzle are coming together right now. All the big H&S tops that I’ve been showing for the last several months or so have painted a very clear picture of what we can expect. I believe we are still very early in this deflationary move. How far and long it goes is anybodies guess but the charts should keep giving us clues as we progress forward.

The weekly chart shows a price objective down to the 117 area for the big H&S top pattern.

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In this weekend report I would like to add some more H&S top patterns to the ones I’ve already shown previously that are still in the making. A strong picture is emerging that many of the European stock markets are starting to top out along with some in this country. Spain and Italy are approaching the their lows made back in 2009 during the crash. I’ve shown many H&S top patterns on the precious metals indexes and  PM stocks that seem to be on the leading edge of the next world wide decline in stocks. I don’t say this lightly as there are H&S topping patterns all over the place including commodities, big cap miners and now the stock markets. I believe the dollar bottomed last week which would put pressure on just about everything else related to a strong dollar. It doesn’t seem like the United States will be immune to the crisis in Europe as the global economies start to slow down affecting everybody.

The first chart I want to show is the DAX German stock market as it has been one of the strongest economies in Europe. If the DAX starts to fall it  will not be a good sign for the rest of Europe. As you can see on the chart below the DAX is fast approaching it’s neckline. The H&S top pattern will not be complete until the neckline is broken to the downside.

The next chart is the daily look at the FTSE which is the London Financial Times stock index that broke two important support rails on Friday. The bottom rail of the little red bearish rising wedge and the bottom rail of the bearish rising wedge. Once the neckline is taken out the H&S top pattern will be complete. Two down one more support rail to go.

Lets stay on the FTSE and look at the weekly chart to put our current H&S top in place. There is a potential for a much bigger H&S top that is in play right now if our current H&S top does in fact play out. Our current H&S top will be the right shoulder of an almost 2 1/2 year very large H&S topping pattern. As you can see we are still trading toward the top of the right shoulder so we still have alot of time left before this possible large H&S top pattern can play out. A break below the neckline at 4800 will confirm the big H&S top pattern is in and the real pain will begin.

:The monthly look shows how this secular bear market has played out over the last 12 years or so. If there was ever a perfect place for a big H&S top pattern to form we are in that place right now.  You can see how the other two H&S top patterns played out after the H&S patterns were completed.

Next I want to show you a couple of weaker European stock markets that are attempting to take out the 2009 crash lows. This is a big deal IMHO as they maybe showing the way for many other stock markets. The MIB Italian stock market is in serious trouble right here as the chart below shows. As you can see the rally that started last October, like so many other stock markets around the world, really was not much of a rally but more of a consolidation pattern that has formed right on the 2009 crash lows. This is a very negative setup as this bearish rising wedge will have enough energy to take price well below the previous lows. You can see the clean breakout and the backtest that took place over the last couple of weeks.

The other weak European stock market I would like to show you is the SMSI, Spain stock market. As you can see this stock market is weaker than the Italian stock market as its already breaking the 2009 crash low. The move off last years low is very similar to the Italian stock market in that it was only able to form a triangle consolidation pattern. So this is a very negative setup for Spain.

Now lets turn our attention to some of the US stock markets and see how they are shaping up. What is very obvious is that the United States has enjoyed a very nice counter trend rally in the context of it’s secular bear market. But there are some warning signs that all might not be good for the US stock markets going forward. As some of the stronger European stocks markets have enjoyed a very strong rally since the lows made last October they were still alittle weaker than the US markets. This last week in the US markets was very telling in that the H&S top patterns that had been forming really showed their hand.

Lets start with the SPX which is the biggest 500 big cap stocks in America. You can see how last weeks decline really shows the right shoulder now that will be complete when the neckline is broken to the downside. There is another bearish pattern that is a bearish rising wedge that created the left shoulder and the head portion of the H&S top pattern. I’ve extended the neckline from the 2011 H&S top pattern that sometimes comes into play further down the road. It looks like the first initial support may come in at 1300 based on the current H&S top measurement and the neckline extension rail. Note how strong the rally was off last years October low compared to the European stocks markets.

Next lets look at the NDX 100 which was one of the strongest markets here in the US. This 100 big cap stock technology index was the star performer since the October low last year with Apple and a few other technology stocks leading the way. As Apple went parabolic there is a very good chance that the fall will be just as swift as the rise. Last Friday’s decline really shows that the right shoulder is now almost complete. A break of the neckline will probably usher in a move down to the brown horizontal zone that once was resistance on the way up and once we broke it to the upside should now act as support initially.

The weekly look of the NDX shows why our current H&S top pattern is forming right where it is. As you can see on the chart below our current H&S top is forming just below the top rail of an uptrend channel. You can also see the potential for a much bigger H&S top pattern if the NDX has a fairly steep drop that comes in close to a possible neckline I’ve put on the chart below. Again there is still alot of work to do but its something to keep an eye on.

Lets look at the RUT 2000 small cap index that can lead the way higher or lower sometimes. Again another H&S top in the making.

The NYA is a broader measure of US companies. As this chart shows it has been one of the weaker US stock market indexes as it fell short of the 2011 high. Note the head portion of the H&S top was also a smaller H&S top pattern. Many times a H&S pattern will consists of three individual chart patterns that make up the whole pattern.

Next I want to show you the very long term chart of the NYA that may have huge implication further down the road. Keep in mind we are still working on the possible right shoulder of a 12 year H&S topping pattern. This pattern still has a very long ways to go yet before we can even consider it a strong possibility. I’m just showing it now so you can see the possible huge move down to the 1650 area as measured by the big H&S top. Just something to keep on the back burner.

Now that we have looked at the European and US stocks markets lets see what the other side of the world looks like, the NIKK Japaneses stock market. Here to another H&S top pattern that is almost complete except for the breaking of the neckline.

I would like to show you one more chart that takes in the emerging markets. This chart is very telling as there are several bearish looking chart patterns that could spell serious trouble for the emerging markets which would be another big blow to the global economy. Unlike the US stock markets that enjoyed a very strong rally off the October 2011 low the EEM had a decent rally but nothing compared to the US rally. Note the move off the October 2011 low that was only able to create bearish rising wedge. Note the three individual patterns that are making up this large H&S top. The left shoulder consisted of an expanding triangle. The head portion is a smaller H&S top and the right shoulder is a bearish rising wedge. Three patterns creating one big pattern.

At the beginning of the article I mentioned that I thought the Precious Metals indexes were leading the stock markets lower. As you can see on the charts above most of the H&S top patterns still have a little ways to go yet before they can be declared complete. Not so with the Precious Metals indexes as  they have completed their big H&S top patterns last month. Lets start with the HUI H&S top that I’ve been showing for sometime now that few realize its importance to the precious metals stocks.

The XAU monthly H&S top pattern.

The GDX monthly look.

This next chart of the GDXJ small cap precious metals stocks probably worries me the most because I know alot of perma bulls will hold on to the bitter end. What this big H&S top pattern is suggesting is that this index could be cut nearly in half before reaching a measured move down to the 12.90 area. I know many think that is impossible but I can assure you stranger things have happened in the stock markets.

I could go on by showing some of the commodities charts that are not looking very good at this point. I think its very possible that we are entering another deflationary episode that will take the inflationists by surprise. It looks like we are still in the early stages of this scenario playing out and if it does then cash will be king down the road. I know there are several long term cycles coming due between now and 2014 which may play a key role in a deflationary cleansing of the system. As always time will tell but if you start to see some of these H&S top patterns playing out to the downside take note. This isn’t about being right or wrong its about protecting ones hard earned capital.  All the best….Rambus

Here is a good chart to end the week with as the price of gasoline affects us all. GASO has just broken down from a small red rectangle and has now completely closed the big gap made on the way up. Notice the reverse symmetry annotation on the chart below. There is a good chance that we will see gasoline fall pretty hard as there wasn’t much in the way of any consolidation patterns made on the way up so there isn’t much to stop the price action as it comes down. Alot of times how a stock goes up is how it will come down in a situation like this.

SLW and SIL have very similar chart patterns. Yesterday I showed you the chart of SIL and how it was breaking below its all important blue bottom rail of it’s big bear flag. SLW in now testing it’s bottom blue rail again today. You can count four touches of that bottom blue rail counting today’s. If this stock goes it will not be a good thing for the rest of the PM stocks IMHO. This one carries alot of weight for me.

The matching SIL chart.