Stocks higher, gold lower

q0926.pngStocks gapped up on the opening. News of union negotiations with GM helped spark early rally, then markets drifted sideways until late in day when rumor that Buffett might be buying or have bought large portion of Bear Strearns. Traders had second thoughts about that near the close and about half that late rally was taken back. However indexes still closed with decent gains. The Qs, which have been the strongest index, closed about where they opened the session. Momentum is still climbing by most measures, although my very short term indicator is still showing a down arrow only because it can’t get above its regression line. In such cased I turn to the double stochastic that I used in the chart yesterday, or the adaptive CCI included in the chart today. The CCI is clearly above the +100 line, which is showing a strong trend, and prices are well above the three day pivot. The only doubt of continuation is the small indecision bar today. If that small candle, with the open and close near the same level, is left on the chart with a lower bar tomorrow, a retest of the July 19th breakout would be likely. There is always a wall of worry to climb, whether technical or fundamental. For now the uptrend is intact, but one should always be on the lookout for signs of a reversal.
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I heard on CNBC today that gold was correlated to oil at 90% and negatively correlated to the dollar by 70%. I know this not to be true for any length of time, although it can be true over very short periods of time. The above chart is a standard correlation function used on the continuous gold and crude oil weekly contracts going back nearly four years. There is no time that this study shows a 90% correlation to oil, although there was a moment when the correlation hit 70%, and two periods when the correlation went negative.
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The above chart shows the correlation between gold and the dollar index. It should show a negative correlation, since when the dollar declines gold is thought to advance, and over the same time period as the previous chart that seems to be the case. There were several brief periods of -70% correlation, but also several periods of near zero correlation.
I point this out for two reasons. The first is to show that one should not assume what is heard by financial journalists to be true. The more important reason regarding trading gold is to know what is driving gold. If the dollar is falling and gold is advancing, it should be known if the rise in gold is simply the adjustment for the currency, or is there is actual demand for gold. If gold is advancing because of demand, it should be rising in other currencies as well. If it is just staying even with the euro currency and only advancing against the dollar, then one is really just playing a currency move. A declining dollar could certainly help fuel inflation and that could cause investment demand for gold beyond just the currency play.

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