An update to review the relationship between SPX and gold through the lens of the Q4 2018 market correction. As we’ve noted repeatedly, a downturn in the stock market would be essential to a new bull phase in gold.
Yesterday SPX pulled back and to the surprise of probably no one, spent the whole day clawing back after gapping down. But it is a candidate to top because it has not yet passed the top-test. We hold open the prospect of a rise to the 3000 area but also the current area is a valid top.
The point of this update is that IF the stock market is topping the Q4 situation provides a handy reference on how gold might act in the short-term. Gold had been declining into the September stock market top and it took one final drop as the stock market took its first hard leg down (darker red zone on the chart). That cleared out the remaining weak gold bugs before a big rally that lasted nearly 5 months.
Gold has done good work in declining for about 2.5 months and technically, continues to look like it has a date with the SMA 200, at least. IF SPX is topping and if the Q4 2018 situation is a decent guide gold could drop with the stock market to whatever support level will arrest the decline (there are more levels at 1240 and 1210 as shown) before beginning a new rally. The Q4 rally began in October with an impulsive spike upward and gold then rose as the stock market tanked into Christmas Eve. Then it kept on rising for 2 more months even though risk was then switched ‘on’ (although market participants did not fully believe it as they do today). Gold went off sides into the late February top at which every bull horn in the gold community was trumpeting.
The stock market always was going to recover yesterday because that is what usually happens on headline-stoked knee jerk reactions. There is a good case for continued bullishness into what I think could be a bull trap as the media blare “SPX 3000!” and “MELT UP!”.
But there is also the potential for a top now, and if that is what is happening we have a road map for gold if the Q4 situation is a good guide. That would be for a final drop to support in gold before another rally.