Dax Confluence & Gold/Oil Ratio

<p>Our July 3 piece “Why Gold & Oil Point to Higher Equities?” made the case for further gains in the major stock indices on the […]</p>

Our July 3 piece “Why Gold & Oil Point to Higher Equities?” made the case for further gains in the major stock indices on the rationale that a decline in gold relative to oil prices paves the way for an improvement in risk appetite (more favourable for energy prices than for metals). Since then, Gold/Oil Brent ratio has declined 7% and major equity indices are 2-3% higher after an interim decline in July 5-9.

We explained that a rising Gold/Oil Brent ratio reflects the declining value of oil, resulting from weaker demand/global growth conditions. Conversely, a falling G/Brent ratio reflects the proportional stabilization in oil, which is usually accompanied by a rise in risk metrics, such as equities and energy currencies.

Shifting to equities and their technicals, Germany’s Dax-30 is up 13% from its June 5th low. More importantly, it broke above the important levels of 6575-6585, presented by the 100-day and 100-week moving averages. The mid-point of 6580 is the overlap of both of these important averages. Such overlap is known as a level of confluence—an important property in technical analysis. The fact that the Dax has risen 100 pts above this level, may allow for further gains, with 6895 in focus.

If we anticipate further declines in the Gold/Brent from its current 15 towards 13.50s, then further run-ups in equities may be in store. 7000 on the Dax may be a possibility as a 0.75% LTRO becomes increasingly likely at the same time that the probability of a Fed QE3 remains on the ascent.

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