U1 and XAU18: Some New Tools
Today’s action in the NDX is miniscule. However a slight development of a hook in I3 of the short term Trip I is present. We just may get a move to the upside tomorrow that will confirm the advance. Meanwhile we shall look at some new tools: U1 and XAU18.
U1 and XAU18
Let us note an addition to the right graph above showing the Trip I (800). There is a new curve labelled U1. This curve U1 is the Trip I I1 trend index taken from the Trip I (800) graph of the XAU18. More generally, if the weight in the Trip I graph were to change then so would the weight on U1. As a mnemonic the U in U1 was chosen to be the last letter of the XAU.
The XAU18 is defined in the previous post, A Bound on the NDX, and is 18 times the value of the XAU. I would strongly recommend my readers to view this post for it describes the rationale for the construction of the XAU18 which is expected to be an upper bound on the NDX. There you will find the assumptions and argument made to justify this claim. Perhaps somewhat implicitly.
We will in the next few weeks see if the XAU18 is a significant bound on the upward movement of the NDX. This upper bound is expected to be very loose in general and will not meaningfully constrain the NDX but occasionally–as now– it may be relevant. At such times it shows promise as a constraint on the upward movement of the NDX.
However, in the context of the Trip I it is better to use the XAU18 in the form of U1. The U1 curve is an I1 index of the XAU18. It inherits the boundary property of XAU18 to become an upper bound on the I1 index curve of the NDX. Since we are using Trip I to examine the behavior of the NDX a Trip I compatible form of the XAU18 is desired.
A last point. Neither XAU18 nor U1 are likely tools for the ages. They are based on the behavior of the relative strength of the NDX relative to the XAU in the last 10 years and eventually this behavior will change. But for the next six months they show promise of making a contribution and may last longer.
So what does all this tooling up get us? If the XAU falls relatively to the NDX then XAU18 will decline from above towards the NDX. This means that if XAU18 is a constraint then falling gold share prices and/or falling gold prices will restrain an advance in the NDX or even force it lower. Thus XAU18 and U1 are deflationary bounds (constraints) on the NDX.
So will gold prices fall? Will the constraint bite? All matters for another post.