Today I want to look at a couple of ratio charts concerning gold. Ratio charts are a good tool to see how one item is preforming against the other and where is the best place to invest one’s capital. We are going to look at the very long term monthly charts of the Gold to SPX and Gold to CCI to see if gold has really been a good investment compared to the stock markets and commodities. First we’ll look at the Gold to SPX and see how gold has fared compared to the 500 biggest cap stocks in America. If gold is out preforming the SPX the chart below will have an upward bias showing gold’s relative strength. When looking at the left side of the chart below, gold was probably one of the worse investments during the stock markets raging bull market that ended in 2000 about the same time the bear market for gold was ending. Notice the almost 4 year H&S bottom for gold at the bottom of the chart. It took four years to reverse the downtrend that had basically been in place since gold’s bull market top at 850 in January of 1980. There can be no denying, by looking at the Gold to SPX chart, that gold has vastly outperformed the biggest 500 companies in America.

Gold to SPX monthly ratio chart showing gold’s relative performance to the SPX.

Next, lets look at how gold has fared against a basket of commodities using the CCI commodities index. By looking at the chart below you can see how gold gradually outperformed the CCI since its bear market low from 1998 to 2001 bottom which also created a double bottom which intern is the head of a massive 20 H&S bottom. Gold showed modest relative strength to commodities, in general, until the 2008 stock market and precious metals crash. That crash helped forge the right shoulder and was the percourser to gold’s rally that would go vertical compared to most commodities. It was a massive rally that took out the 20 year neckline and showed gold was finally in charge. After such a big rally gold needed a rest. The resting period for gold to the CCI took the form of a bullish flag pattern that found support right where one would expect to find it, right on the 20 year neckline. Perfect TA. Three months ago this ratio broke out of the flag formation and is now ready to begin outperforming commodities. So the chart below shows how gold is getting ready to outperforming commodities, in general, and is still the place to be invested compared to the stock markets and most commodities.

Gold to the CCI index monthly look.

Sometimes looking at an inverse etf can give you alittle boost of confidence when the chips are down. I follow DUST which is a 2 x gold miners bear etf. Last week we broke the neckline of a beautiful H&S top pattern. Today’s action took DUST all the way up to the neckline for it’s backtest while the HUI and other PM indexes were backtesting their neckline from the topside. If the precious metals indexes can hold onto their rebound, into the close, there should be a nice long tail on the daily bar.

DUST daily H&S backtest to the neckline.

This morning’s hard down move stopped right where it should have on the HUI and other indexes. This is what I call “THE SHAKEOUT MOVE”. All weak hands had plenty of time to unload their shares and feel better about themselves for getting out. As an investor think back to this mornings action and your mental state at the time. The easy thing to do was to relieve the pain that you were most likely feeling. We are just playing a game of psychological warfare. Buying the pain is alot harder to do in reality and in real time and visa versa at the top.

What you want to do now is look for the leaders that came charging back off their lows this morning. These stocks will likely be leading the next charge higher.

The Dow Jones is also doing an important backtest today along with the precious metals complex. I’ve labeled the our most recent correction as a double bottom. Once we broke thru the top rail last week we headed straight for the old neckline that marked the top and led to the correction we are now in. On the chart below you can see how the old neckline came into play and stopped last weeks rally dead in its tracks. This was the most obvious spot for our backtest to begin from. This weeks action has taken us all the way back down to the breakout point where we are in the process of backtesting as we speak.

INDU daily backtest.

Just like gold and silver the HUI is also backtesting an important support rail, the neckline of a 5 week inverse H&S that formed on the bottom rail of the much bigger one year expanding triangle. These backtests never feel good when you watch them in real time. Always feels like the end of the world but in actuality the backtest represents a very low risk entry point. You have a line in the sand where you can enter a sell/stop if the backtest fails. So watch the neckline very close in here and act accordingly.

HUI 60 minute H&S backtest to the neckline.

Below is a daily line chart of the HUI. The 500 area has been a good place to buy precious metals stocks for the last year. I labeled our last bottom as a possible double bottom. As you can see today’s action has taken us down to the double bottom hump. What we want to see on this daily line chart is for today’s close to be real close to where it is right now or higher. If this is truly a double bottom then the double bottom hump will hold support.

HUI double bottom hump support.

GLD is backtesting the top rail of it’s 5 point bullish rising flag. Just like SLV, the backtest is in progress at this moment. We penetrated the top rail to the downside but GLD is now back above the all important line in the sand. This is a most critical time for GLD. Stay tuned.

GLD 60 minute backtest.

This mornings decline in SLV took us right to the top rail of the 5 point triangle reversal pattern. This is an important test of the triangle. The backtest is the last step in confirming whether a chart pattern is valid or not. Below is a 60 minute chart I have been showing since the triangle started forming at the end of September. This backtest was to be expected but now is the moment of truth. The top rail needs to hold or the triangle may fail. So far we have bounced off the top rail but the backtest is still in progress. So far so good

SLV 60 minute triangle backtest.

Today we are getting a little correction from last weeks breakout move from the 5 point bullish rising flag formation. As you can see on the chart below we were able to close one of the 2 overhead gaps GLD made on the way down. Fridays action took us up just to the underside of the top gap where we are getting today’s correction. I’ve marked in yellow today’s gap down which should get filled in the not to distance future. If we backtest all the way down to the top rail of the rising flag we could see 165.40.

GLD 60 minute look.

The daily look shows how we hit the top rail last Thursday on the bullish rising wedge pattern. The action GLD has been giving the technical trader has been textbook in that the support and resistance points are playing out just as you would expect. Now GLD has overhead resistance at the top rail of the bullish rising wedge and support should now come in at the top of the red 5 point bullish rising flag. Watch those two areas for further developments. The really big thing to watch is the top blue rail of the bullish rising wedge. Once we get above that top rail we should move on up to test the double top area around 1925 or so. One step at a time.

GLD daily look.

After last week huge run it stands to reason that its time for alittle profit taking by some traders. This is all normal price action. No matter how bad you may want it to be, the markets never go up or down in a straight line for very long before profit takers come in. Today’s daily chart of the HUI shows why we are getting some weakness. The last high made in September was a double top. There was a false breakout of the top rail and then another total reversal point was made all the way down to the bottom of the trading range. Getting back to the double top. Whenever you have a double top or double bottom the hump or the V is always a good place to look for support or resistance. In this case, the double top hump, is acting as resistance. As you can see last weeks rally stopped right at the bottom of the V of the double top. Today’s action is what you would expect on the first hit of that area. Now what we have going is resistance at the double top hump and support at the neckline of the H&S bottom. So we are probably going to do a little ping pong move between the overhead resistance and the neckline support area. I’ve labeled the support zone with a brown rectangle. This is important support to watch.

HUI daily support zone brown rectangle.