Dollar, Euro & Gold

Dollar, Euro & Gold: 
The Fickle Correlation…

10/30/13 INSIIDE Track:  “Outlook 2013/2014…              A Seismic ‘Shift’?


Probably the most common questions I receive – with regard to this and a lot of other analysis – have to do with correlation.  Usually, it is framed in a sense of disbelief (e.g. ‘How can Gold go down if the Dollar is going down’?).  

            I try to address this issue repeatedly, since I think it is at the core of a very dangerous approach to the markets and to trading.  

            Although I agree that the general correlations remain intact, they can invert for weeks or months at a time – due to some current anomaly or extreme circumstance – and then a trader is left wondering which analysis to follow (if they are using analysis in one market to influence or govern decisions in a ’correlated’ market).  

Recently, the on-again/off-again relationship between Gold & the US Dollar was addressed in the 10/19/13 Weekly Re-Lay:  

“Gold & the Dollar declined from Nov. 2012 into February 2013, at which point they set lows within 2-3 weeks of each other.  At that point, both began to rally – with the Dollar embarking on what would ultimately become a ~5-month advance.  From mid-February through mid-March, they advanced in lockstep (in contrast to what so many traders state is impossible; think Euro weakness).

Even through April, they traded in similar directions with both Gold & the Dollar declining.  The difference was the Dollar held support (its Nov. ’12 high) while Gold plummeted to new lows – dropping about $150/oz. is less than two weeks. 

They both traded similarly in April – June, setting initial lows in mid-April and then swinging back and forth – with sharp declines in the middle half of June.  From there, the Dollar experienced a quick surge into the first week of July while Gold continued declining into the last week of June.

Depending on which pockets of time you view, the Dollar & Gold either traded in complete opposition (the ‘normal’ correlation) – from late-Sept. 2012 into early-July 2013 OR spent the majority of that period trading in the same directions (an anomaly?)… but at different degrees.  In many cases, the intermediate highs & lows were only 1-2 weeks apart.

…the Dollar is expected to set a major low in the coming week (within days of Gold’s latest low) and could unfold similar to what was seen in Feb. & March 2013 – when it finally broke through resistance at the same time Gold was holding resistance.  The ensuing declines – into mid-April – were of sharply different magnitude – allowing Gold to spike down to its primary, 1-2 year downside objective.”

            The Dollar did bottom last week and Gold has just tested resistance and turned back down… similar to early-2013.  The market-to-market correlations can be very fickle… and so too can traders’ emotions.  When (for example) events in Greece are melting down and everyone’s focus is on the Euro, Gold & the Dollar can rally together.  

            A short time later, when Greece’s economic woes were suddenly resolved (for the moment) and focus turned back to the Dollar, Gold traded more in synch with the Euro… and at opposition to the Dollar.  The correlation is determined by the focus!

            There are also times when two seemingly non-correlated markets trade in tandem BUT at significantly different degrees.  So, on a day-to-day basis, they could both be rallying or both declining even while the overall moves are significantly different.

            [If you wonder how is this possible, consider two hypothetical markets with market ‘A’ rallying 20 points while market ‘B’ rallies 5 points.  The next day, ‘A’ drops 5 points while ‘B’ declines 15 points.  Similar action unfolds on Day 3.  Then, on Day 4, market ‘A’ surges 35 points while ‘B’ rallies 10 points.  Finally, Day 5 sees ‘A’ drop 12 points while ‘B’ declines 21 points.

            When one looks at each individual day, the two markets traded ‘together’.  When one steps back and looks at the overall week, market ‘A’ gained 33 points while ‘B’ dropped 36 points – in complete opposition to one another.  Looks can be deceiving!  This is similar to what has taken place between Gold & the Dollar Index during much of 2013.]…

The Dollar Index dropped precisely into a myriad of cycles on Oct. 21–25th and bottomed in perfect synch with its 19-20 week cycle and ~60-degree low-low-low-(low) Cycle Progression.  (See Oct. 2013 INSIIDE Track for chart and corresponding analysis.)  This was/is expected to trigger a new multi-month advance.

The Euro fulfilled analysis for a culminating rally into Oct. 21–25th – when a 19-20 week high-high-high-high Cycle Progression AND a ~9.5 week high-high-(high) Cycle Progression came into play, as well as a 7-8 week high-low-low-low-low-(high) Cycle Progression).  It immediately reversed lower and has accelerated to the downside.

This has the potential to trigger a new, multi-month Dollar advance/Euro decline into 2014.”