The Dollar Index and Gold
The Dollar Index has a history, and indeed the charts show we have been at and below current levels before. So now the question is, Will price “Bounce or Break” off of familiar levels?
Looking at the Charts of the US Dollar Index and Gold ETF
US Dollar Index (Symbol DX - eSignal) Monthly and Daily Charts
US - DX: The Monthly Chart (click to enlarge) gives us a text book lesson in Fibonacci retracements and extensions. The Trade Weighted Index made a double bottom which coincides at the 75% Fibonacci retracement level .
Drawing the Fibonacci retracements from the 1993 low to the 1994 high gives us a 38.2 retracement that held the March 2009 high of 89.60 and the 138.2 Extension 0f 70.70.
So this monthly chart looks ominous as a drop to the 1993 lows looks possible.
US - DX: The Daily Chart (click to enlarge) of the US Dollar Index shows the decision point quite clearly. We have extremely strong support at the current level of 76 - which is a 75% retracement of July 2008’s low to the March 2009 high.
78 Would Be Great - 72 What Would You Do?
We can now Bounce or break off of this level - with targets of 78 for a bounce up to the 61.8 Retracement - OR - a drop down to retest the July 2008 low of about 72.
GOLD - GLD ETF - October 9, 2009 Makes Weekly All Time High
GLD - The Weekly Chart above (click to enlarge) shows the GLD Gold ETF shows some text book lessons for technical analysis. The GLD ETF hit a high of 104.15 while spot Gold traded at over $1,060 an ounce.
An inverse Head and Shoulder pattern with a broken resistance “Neck Line” and a Triangle Pattern at the Right Shoulder that is already in play is heading towards the 125% Fibonacci Extension of 108. This would correspond with Spot Gold prices of about $1,100
The Head and Shoulder Pattern has a target at approximately 120, that is convergent with a significant Fibonacci extension of 161.8% This would correspond with Spot Gold prices of about $1,300
The Headline Indicator - Explained
The front page of the Financial Times on Thursday Oct 8, 2009 featured the US Dollar Index “as fear grows over currency”. There is a fundamental-news type indicator that is sometimes quite handy to keep in mind of, the concept being: “If it’s on the front page of the paper and on the lips of people that rarely speak about it… it’s probably over bought - or oversold.
My trading methodology is what I call 90% technical-charting and 20% Fundamental-News but exponentially weighted. (meaning that the fundamental news has a half life of 5-30 minutes for things like GDP reports, and even Non Farm Payroll - Unemployment Numbers).
Headline Surprise - or Expected?
The Headline Indicator has different connotations that traders pick up on after a while. If there is an unexpected event of either extreme negative or positive news that has no precedent, and no one knows just how bad the repercussions can be - then the Headline Indicator may be a catalyst for an extreme move yet to come. However, if Walmart (for example) is picked to be the “Stock of the Year” and it is seen on the checkout line of your favorite shopping place - the likelihood is that it’s made a top.
US Dollar Down - But Not Out!
So, in conclusion: Yes - the US Dollar is being shed - but perhaps it has been punished enough for now, and a retracement is in order. As for Gold, well the paper money has to go somewhere - and hard commodities that are easily exchangeable might just be the new currency of choice for a little while.
The question really is….. Where would you park your money?
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