The Dow Report: A Look At The XAU
By Tim W Wood CPA, February 20, 2004
Notice on the daily chart of the XAU below, that I have marked each trading cycle low, since the March 2003 rally, with a "t." As you can see, this cycle runs approximately one month in duration. Now, look at how each of the trading cycle lows, between March 2003 and December 2003, occurred at a level above the previous trading cycle low. Also, notice that during this same time period the trading cycle tops all occurred above the previous trading cycle top. This is all indicative of a bullish pattern.
However, this bullish pattern was broken in January 2004. The breaking of this pattern has consequently turned the cyclical structure of this index bearish. This occurred with the move below the December 2003 trading cycle low. Notice that after that break, the next trading cycle low, which occurred in January 2004, occurred well below the December low. Additionally, we have moved into the timeframe for the current trading cycle top and it has thus far fallen short of the previous trading cycle top. If we have in fact seen the current trading cycle top at these levels, it should set the stage for another move down to retest the most recent trading cycle lows. If the most recent trading cycle low is violated on this retest, such violation will serve as further confirmation that the bearish forces are still dominant in the gold sector.
Now, I want to draw your attention to another observation. Below is a weekly chart of both the XAU and the DJIA. The XAU is the upper chart and the DJIA is the lower chart. I have marked the 20-week cycle lows on both charts with a "p." First, let's look at the DJIA. As you can see, this 20-week cycle is fairly dominant and fairly consistent. This cycle last bottomed in the DJIA back in November 2003. The week ending February 20, 2004 will conclude the 13th week for the current cycle in the DJIA. At this time there is no evidence that the current 20-week cycle has topped. However, there is evidence that this cycle appears to be running out of steam and when it does, it will correct down into the 20-week cycle low.
Let's now turn our attention to the weekly chart of the XAU. Notice that the 20-week cycle tops and bottoms in the DJIA do not occur exactly in sync with the tops and bottoms of the XAU. However, you can indeed see the influence that the 20-week cycle in the DJIA has on the XAU. Sometimes one index will lead and sometimes the other one leads. But regardless, the influence of this cycle can be seen in the XAU.
So, the point that I want to make here is that we have already seen a breakdown of the shorter-term trading cycles in the XAU. This indicates that the XAU is leading this time around. Also, remember that we have just completed the 13th week of the current 20-week cycle in the DJIA and that it should be approaching a top in the not too distant future. So, when we combine the fact that the XAU has thus far been the weakest and the fact that the 20-week cycle low still lies ahead for the DJIA, it is hard not to at least consider the possibility that more weakness in the XAU could still lie ahead. Also, the cyclical structure of the XAU will remain bearish until we see either a higher trading cycle top and/or a higher trading cycle low. So, until this happens, we must leave the door open for further downside in the XAU.
Weekly XAU vs. Weekly DJIA
The DJIA vs. The NDX
Since were talking about cycles today, I want to take a look at the cyclical structure of both the DJIA and the NDX (NASDAQ 100). Below is a chart of these two indexes. The DJIA is the top chart. Just as I explained above with the XAU, the DJIA has thus far continued to make higher and higher trading cycles lows since the rally out of the March 2003 low began and this bullish pattern remains in effect today.
If we look at the structure of the trading cycle lows in the NDX, we can see that this bullish pattern was violated with the recent decline. This violation occurred when the decline took the NDX below its January 2004 trading cycle low. This violation is noted with the red line drawn under the January trading cycle low. The violation of this low has thereby changed the cyclical structure of the NDX from bullish to bearish. Also notice as a result of this violation that the NDX has failed to confirm the recent highs in the DJIA. This non-confirmation is noted by the blue lines on the chart below. So, in order to turn this picture bullish, we must see the NDX make a higher trading cycle low and/or trading cycle high. As of today, this means that we must see a move back above the January 2004 trading cycle high. A move by the NDX below the early February 2004 low will serve to reconfirm this bearish trend. A move in the DJIA below the January 2004 low will also confirm the break down in the NDX and will turn the cyclical structure of the DJIA negative as well.
The Daily DJIA vs. The Daily NDX
Tim W. Wood
© 2004 Tim Wood