RECENT GOLD SELLING MAY BE HINTING AT INTERIM DOLLAR BOTTOM IN NEW YEAR
REVUE OF NOVEMBER 24 MESSAGE... A number of readers have asked about the recent action in gold and the dollar -- especially after yesterday's $8.00 drop in bullion. Some wondered if the pullback in gold was warning of a bounce in the dollar. The answer is probably yes. But that doesn't come as a surprise. In late November, I posted a market message with the headline: "Dollar Decline Nears Support at 1995 Low -- Gold Stocks are starting to Slip Which Warns of Pullback in Bullion" (November 24, 2004). In that message, I showed that the XAU Index (and Newmont Mining) were pulling back from major resistance. I used a weakening XAU/Gold ratio to suggest that bullion would probably follow gold stocks lower since the stocks usually lead the commodity. Chart 1 shows an updated version of the XAU chart. It shows the XAU pulling back from its early 2004 peak (see circles) and falling back to its 40-day week (or 200-day) moving average. The XAU/GLD ratio also turned down before bullion which warned of a setback in the commodity (see second arrow). Turns in the ratio usually precede turns in bullion. Which brings us back to the dollar.
Chart 1
DOLLAR INDEX NEARS LONG-TERM CHART SUPPORT... Chart 2 is the same chart that I showed over a month ago. The monthly bars show the U.S. Dollar Index (which is the dollar against a basket of six major currencies) nearing potential long-term support around its 1990-1995 lows in the 78-80 region. The USD is closed last night at 80.54 which puts it within a point of that long-term support area. The 14 month RSI also shows the dollar to be in oversold territory (under 30). As I suggested in November, that chart combination raises the possibility (if not the probability) of an intermediate-term rebound in the U.S. currency. Probably not enough to reverse the major downtrend, but enough to keep gold and gold stocks from rallying much. And, as some of you have suggested, it's quite likely that the recent slide in gold is hinting that a dollar rebound is near. My guess will be early in the first quarter. That's because the dollar has a tendency to rebound after the start of a new year.
Chart 2
DOLLAR LOOKS OVERSOLD ... The Dollar chart for the last year shows the interim bottom that formed during January and February of this year -- in keeping with its normal seasonal pattern. The bear market bounce ended during April and the dollar has been falling ever since. The daily RSI line is in oversold territory under 30 as it was at the start of the last year (see blue arrows) but is starting to move higher. That creates a short-term "bullish divergence" between the RSI line and the USD which recently fell to a new yearly low. Then there's the ADX line. That's the black line on the bottom of Chart 2. The Average Directional Index (ADX) is part of the Directional Movement (or DI) lines. The red (selling) line has been over the green (buying) line since September when the latest slide gathered momentum (see red circle). And that's still the case although they came close to crossing this month. The black ADX line (which is the difference between the other two lines) has been dropping during December, which is often a sign that the current trend is in need of some corrective action. If a dollar rebound does materialize in the new year, the horizontal line drawn under the early 2004 lows should act as major resistance.
Chart 3
POINT & FIGURE DOLLAR CHARTS ... The final two charts show two p&f versions of the Dollar Index trend. Chart 4 uses a 1.0% box size and shows the major downtrend that started early in 2002. The first actual sell signal took place in June of that year (marked by the red letter 6) when a column of o's fell beneath the previous o column. Since then, four repeat sell signals have been given -- the most recent occurring during October (marked by the letter A). Chart 4 shows that the USD would have to rise all the way to 90.86 to reverse the downtrend (by exceeding the last column of x's). That's a long way from its current level.
Chart 4
Chart 5
A SHORT-TERM P&F CHART ... Chart 5 uses a smaller box size of .50 and, as a result, is more sensitive to short-term trends. This more sensitive Dollar chart shows a buy signal during March (number 3) of this year at 88, which was followed by a sell signal at 89 during May (5). That sell signal was much earlier than the one given in Chart 4. Chart 5 shows the first level of resistance at 83. That means that a USD rally to 83.50 would be the first buy signal given in more than six months. That would, in my opinion, be a signal that a dollar rebound has started. The recent setback in gold may be hinting that the dollar rebound isn't too far off. A dollar rally could keep commodities under some pressure during the first quarter. A dollar rebound might not be good for bonds either since it might be accompanied by rising interest rates. Bond prices have a tendency to weaken in the new year. Rising rates might cause some nervous selling of stocks.
