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Will this ratio mark the end of the current bear market? At current gold prices that would put the Dow at 800. Seems like a stretch. Or is it? The chart above ends with 2006 data at a Dow/Gold ratio of 20 (meaning that 20 oz. of gold buys a share of the Dow). Where are we now? Based on closing prices of both the Dow and Gold for November 26, 2008, the Dow/Gold ratio is currently 10.7 (8726/814). That means that from the peak ratio of 40 in 2000, we are currently 75% towards the ‘target’ ratio of 1, where an ounce of Gold buys a share of the Dow.

Now that target doesn’t necessarily mean that the Dow will go to 800; rather, it means that the ratio of the Dow to gold will go to 1. So a Dow value of 3000 and a gold price of $3000/oz will produce the target ratio as well.

The bottom line is that, although we don’t know the nominal value of the numbers, what we do know is that a significant bottom will be reached if we see the value of gold buy a single share of the Dow.

in other words, we still have extremely volatile markets, looming further credit contraction, a debt-ridden financial system, and no quick fix.

We might occasionally opine about the dire “macro” economic situation, but our job is to trade, not to blog. And the fact is that if you know what you’re doing, markets such as these are incredibly lucrative, as the increased volatility presents fantastic trade set-ups with astounding frequency. WaveTracker helps us keep up by illuminating key confluence points that we simply could not compute by hand in fast moving markets.

Of course, please heed our advice to be calm and prudent, especially if you’re new to trading. Most importantly, get a methodology and stick to it. Losing discipline means you’ll get cleaned out!

Sure, we’ve matured our trading methodology over the months that have transpired since then. After all, we’re always trying to improve our game, and there’s always more success to be had. Nevertheless, the fundamental insights offered in this piece constitute our trading core. If you’re not familiar and you’d like to see how we incorporate Elliott AWE patterns into our trading, by all means have a read.

A massive loss of faith in the U.S. dollar could be tantamount to the music ceasing to play in a game of musical chairs. We’ll have to see if the Chinese start selling treasury securities. It’s bound to happen sooner or later…

From a wide economic and political perspective, developments such as this are terribly saddening indeed. The system is so broken and current political attempts to ‘fix it’ are so misguided that one has trouble discerning comedy from tragedy.

At the same time, the climate is ripe for trading. Recent market uncertainty has led to incredible volatility and volume, and we’re finding that we simply can’t keep up with all the good trade set-ups that present themselves. Study that price action, get WaveTracker, and be disciplined: because our identified confluence patterns regularly appear, increased volume simply means increased opportunity.