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SPX - GOLD/SPX Ratio - Divergence Signals Meltdown or Melt Up?

This is a a very interesting chart today, on the left we have the SPX as of present time (monthly), in the middle we have the SPX / GOLD ratio (monthly) and on the right we have the SPX chart during the period of the tech wreck (monthly) from 1996-2001.

SPX: Then and Now

Firstly i want to draw your attention to the previously stated rising support and resistance lines, on both SPX charts, the similarities are undeniable. With one major difference, the purple vertical line marks the Repo overnight rate spike and the subsequent global CB liquidity dump into the markets, if we examine the charts prior to this point, the SPX appeared to be in the last wave of the 10 yr bull market, in fact corporate earnings reflected this, as earnings failed Q1, Q2, Q3 and Q4.

The pattern of three slightly higher highs is self evident, albeit the lowers were more extreme during the 2018 topping pattern, with the second down wave being 15% compared with 10% of the 2000's second wave.

What can we conclude from this?

Well, i think that if it were not from the CB pivot to easing monetary policy and a indiscriminate lender in the Fed via the Repo market, then the SPX very well may have retested the lower trendline at around 2,500. Instead the SPX has piled on an additional 410 points onto the index, but the risks have not been alleviated, far from it.

SPX/ GOLD Ratio: Trendline break

The SPX / GOLD ratio tells quite an interesting story, the ratio has been in a steady uptrend since 2012, in other words, stocks have been decisively outperforming gold for that period of time (no surprises so far).

But as you can see, there has been a clear trend break in June-July 2019, the ratio dropped quite suddenly, before reversing and going up to test the trendline from below, the point at which the ratio reversed and began climbing again was during the Repo/ liquidity dump, this is not surprising at all, however, the fact that the ratio has been unable to reclaim the trend before falling away again is quite interesting.

This would suggest, at least according to the ratio, that the SPX may very well have peaked and begun the roll over into a "gold measured" bear market. I want to stress something however, this does not mean much AT ALL, when it comes to the dollar denominated index, what this means, if true, is that gold will also be benefiting from this move higher (should stocks continue higher) and we may very well be entering a "Melt Up" Phase, whereby most if not all asset classes are carried up in a sea of liquidity (for stocks and risk assets) and weaker fundamentals such as gold .

It is worth noting that although stocks are grossly overvalued, as a trader i must acknowledge that billions of dollars will be injected to prevent a 2000/ 2008 style melt down, this may very well result in the most insane rally in equities in modern history.

Bankers know the damage that stock market crashes can do and governments are now dependent on a rising stock market, both politically and financially, therefore i expect to see a sea of liquidity enter the market at the first signs of trouble. But, even a 20% drop from these levels would still be within the two trendlines , so the point at which the liquidity will come, is still uncertain.

-TradingEdge