BOUNCE IN OVERSOLD DOLLAR -- AND PULLBACK IN THE EURO -- CAUSE PROFIT-TAKING IN GOLD
OVERSOLD DOLLAR BOUNCING -- EURO IS SLIPPING... Last Wednesday, we published an update entitled "Oversold Dollar Due For a Bounce". That analysis was based on two factors. One was that the Dollar Index had reached a long-term support level in the low 90s (which was the low hit during the second half of 1998). The second was simply due to the fact that our short-term indicators -- like the RSI and MACD lines -- were turning up from oversold territory. We also expressed the view in that write-up that a bounce in the dollar would cause profit-taking the Euro and the gold market. That scenario appears to be playing itself out. Since the Euro has been the strongest foreign currency, it's new weakness is playing a key role in the dollar bounce. The daily chart of the Euro shows that the RSI line has turned down from overbought territory over 70. More importantly, the daily MACD lines have turned negative. The daily price chart shows the Euro stalling near its historic high around 119 (which is where it started trading during January 1999). Since the Euro has been closely correlated with gold, it's weakness is pushing gold prices lower.
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GOLD CORRECTING... Gold is falling today to the lowest level in several weeks. The RSI line has turned down from overbought territory and its daily MACD lines have turned down (just like they did for the Euro). The presence of overhead resistance near the February high may also be contributing to some profit-taking in gold. With gold now trading in the low 350s, we think it could retest its 50-day moving average (which right now sits at $345). We think, however, that would represent another buying opportunity. Not surprisingly, gold stocks are correcting as well.
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XAU GAPS DOWN... The daily chart shows the XAU Index gapping down today. Combined with the upside gap formed last Thursday, that leaves a potential "island reversal" pattern behind. That's usually a short-term negative sign and suggests that the XAU could retrace all the way back to its late May low. That would also bring it back to moving average support.
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NEWMONT BACKS OFF FROM RESISTANCE... Newmont Mining is the biggest stock in the XAU -- and therefore the most influential. The daily chart shows NEM backing off the 32.50 level. Its weekly chart shows why that's important. Last Thursday, we pointed out that Newmont was testing the highs of last spring near 32.5. We still think it will eventually get through that barrier. Right now, however, that overhead resistance level is causing some short-term profit-taking.
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