Hark Back to March 20 When I Said …

Well, you can read what I said on March 20: This Dovish Hawk Will Die on April 7th.

But today I want to show you what I showed you on March 20. Back when I was pondering the near future for gold, U.S. stocks and the euro.

I gave you a chart of the euro to start. Here it is again, updated with the latest price data at the time of this writing.

The euro is only now reaching a level I thought it would reach closer to April 7. And it’s fallen well short of where I thought it would be trading today. But that doesn’t mean my original May 5 target will not still become an important inflection point.

Before I move to the S&P 500 futures chart I showed you on March 20, let me slide in a bonus chart. Here is gold with the same two target dates drawn in.

Again, gold did not get to where I thought it would by now. Quite the opposite.

At the time of this writing (Thursday, May 4), gold was trading very sharply lower (-1.5%) while the euro was trading respectably higher (+0.5%). This divergence typically doesn’t happen without some news catalyst, since they are both priced vs. the U.S. dollar.

So, what gives?

I wish I knew.

Looking at those two charts, they both appear to be at potential inflection points. Based on their respective chart patterns, the euro looks vulnerable to turning lower while gold looks poised to turn higher.

Such a move would be consistent with today’s negative correlation. But it would challenge the status quo that a strong dollar is a weak euro and a weak gold price, and vice versa. In other words: It would be a bit surprising to see gold and the euro move in opposite direction for a protracted period of time.

If we can rule out that scenario — which is a big IF — then we have to figure out which of the two recent moves will leading the way forward.

Despite my bias for wanting the price of gold to go higher, I’m worried that the U.S. dollar (as measured by the U.S. Dollar Index) is soon due to strengthen and bring pressure on the euro similar to what’s going on with gold already.

Such a move is likely to apply new pressure to gold and send it reeling for several weeks.

That’s my concern, anyway.

Maybe U.S. stocks can help clarify the future of these correlations …

Here is a chart of the S&P 500 futures that I included on March 20, updated with current price data.

My instinct was correct that the S&P 500 would need until beyond April 7 before it topped out. I thought it could conceivably rally by 7% come May 5. Clearly, that hasn’t happened.

But will it? Should it? Is the S&P 500 more likely to blow off to new highs than to fall from a double-top?

I think so.

Am I confident that U.S. stocks can continue climbing the wall of worry built on top of debt as well as geopolitical, fiscal and monetary risks?

No.

But I think it needs to finish its long-term wave pattern before we can start speculating that the bull market is over and incapable of sustaining lofty valuations. Besides, a blow-off top it the most logical place at which a significant correction will begin.

If I am right about the coming upside in U.S. stocks, there is a good chance the U.S. dollar will join in the fun. The two will likely move higher together on a risk-appetite move, continuing what began wholeheartedly after the election of Donald Trump in November.

Such a development would not bode well for the euro or gold over the next several weeks.

Do right,
JR Crooks

Your thoughts on “Hark Back to March 20 When I Said …”

  1. It could be that in Europe when people think things are in trouble they buy gold and dollars and sell Euros. So gold and dollars both go up (and gold goes up relative to the dollar). When things go well for the EU (like with the election in France) then they sell both gold and dollars and buy Euros (and they sell more gold than dollars so gold goes down relative to the dollar).

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…