WEAK SEPTEMBER JOBS REPORT HURTS DOLLAR BUT HELPS FOREIGN CURRENCIES AND GOLD -- USING DMI/ADX AND PARABOLICS ON XAU

FOREIGN CURRENCIES JUMP AGAINST DOLLAR... Today's weaker than expected September jobs report is having a negative impact on the U.S. dollar which is falling against its major foreign counterparts. Charts 1 and 2 show today's jump in the Japanese yen and the Euro. The yen is jumping to a two-week high while the Euro is moving up to challenge its summer peak. The last time I showed the Euro (on September 30) I stated that I believed that an upside breakout was imminent for the Euro. That's because the Euro has a positive relationship to the gold market, which has already turned up. Since gold moves in the opposite direction of the US dollar (which has been falling), that means that it moves in the same direction as foreign currencies (which are moving higher). Although I'm not showing it here, the Canadian dollar is trading at the highest level in ten years. All of this is bullish for gold and gold stocks.

Chart 1

Chart 2

GOLD HITS NEW SIX-MONTH HIGHS... Thanks to today's dollar drop, gold bullion is trading $5 higher ($424) and is drawing closer to its 2004 high near $430. I continue to believe that gold is in the midst of a major bullish trend that has a long ways to go. That's obviously very bullish for stocks tied to gold which, coincidentally, are up 3% today and are the strongest group in the stock market. Chart 4 shows the Gold & Silver (XAU) Index moving up to challenge the previous high hit in April. Its relative strength line (XAU:S&P 500) is climbing as well.

Chart 3

Chart 4

WILDER'S DMI (ADX) LINES AND PARABOLICS ON GOLD... Yesterday I showed the interplay between Wilder's DMI (ADX) lines and Parabolics on oil stocks. One of our readers has asked me to do the same with gold. Chart 5 applies both indicators to a daily chart of the XAU Index. The Parabolic SAR dots have been trailing under the XAU for the last nineteen trading days (about four weeks). Today's value is at 99.45. That means that the XAU would have to hit the highest dot (see blue circle) to signal some short-term profit-taking. The chart shows how sensitive the Parabolic system is. When the SAR dots are above the price action, the Parabolics are on a short-term sell signal (see red arrows). That usually happens during a pullback or a consolidation. When the dots switch from over to under the price bars, the system has switched to a buy signal (see green arrows). The uptrend remains intact until the highest SAR dot is hit.

Chart 5

DMI (ADX) LINES ARE BULLISH ... The DMI (ADX) lines under the price bars are also positive. The green (+DI) line crossed over the -DI line in early August (see green circle) which signaled a new uptrend. They're still diverging which is positive. The (black) Average Directional Index (ADX) is rising which means the uptrend is still intact. The fact that the ADX line is still below the upper green line suggests that the uptrend has further to go.

WEEKLY PARABOLICS FOR LONGER TERM INVESTORS... I mentioned yesterday that the sensitivity of the parabolic signals might not be suitable for those with a longer term horizon, and suggested that a weekly parabolic chart may be more suitable for long term investors. Chart 6 shows the XAU weekly bars for the last year. Only two parabolic signals have been given in 2004. A sell signal was given during January (see red arrow). A buy signal was given during June. That signal is still in effect. The weekly price would have to drop to the last SAR dot to give a sell signal. The system has a built in acceleration factor so that the dots will start hugging the price action more closely as the uptrend continues.

Chart 6

TRADEOFF BETWEEN LONG AND SHORT TERM SIGNALS ... Most technical indicators can be applied to daily and weekly charts. [In most instances, the same indicator values are used]. The signals on daily charts are more sensitive and therefore more suitable for short-term trading. Weekly signals are less sensitive and more suitable for longer term investing. There's value in each approach, but also some drawbacks. Shorter-term signals will get you in and out sooner, but increase the risk of short-term whipsaws (bad signals). While short-term signals will stop you out of positions sooner (and preserve more profit), they may also get you out of a profitable trade too soon. Weekly signals are less volatile and will keep you in a major trend longer. But they may keep you in too long when a market turns. My suggestion is to use weekly signals for longer term core positions that trade very little. Use daily signals for that portion of your position that is more trading oriented -- or to fine-tune your core holdings. There's always a tradeoff between using short and long term signals. There's no reason why you can't use both and have the best of both worlds.