THE DOLLAR INDEX IS RALLYING FROM LONG-TERM SUPPORT AND OVERSOLD CONDITION -- IT'S NEARING A TEST OF MAJOR RESISTANCE AT 85

DOLLAR INDEX NEARS LONG-TERM CHART SUPPORT... I've gotten a lot of requests to update my views on the dollar. Before doing that, however, I need to point out that nothing that the dollar has done since the start of the new year has been a surprise. In fact, it's doing exactly what it should be doing -- rallying at the start of a new year from long term support and an oversold condition. Chart 1 shows an updated version of the Dollar Index that I wrote about on November 24 and again on December 30. The headline for this paragraph is taken from the December message -- as are the notations shown in Chart 1. The monthly chart shows the Dollar Index having reached long-term support at 80 which coincided with the lows formed between 1990 and 1995 (see circles). The chart also shows the monthly RSI line in oversold territory under 30. I wrote at the time that "that combination raises the possibility (if not the probability) of an intermediate-term rebound in the U.S. currency". I also wrote: "My guess (for a dollar rebound) will be early in the first quarter". Part of that reasoning was based on the fact that gold and gold stocks had been dropping during December, which hinted at a dollar rebound. I concluded that a dollar rebound would be "probably not enough to reverse the major downtrend, but enough to keep gold and gold stocks from rallying much".

Chart 1

DOLLAR LOOKS OVERSOLD ... This headline and the following chart are also taken from the December 30 market message. All the notations on the chart are shown exactly as they were then. That earlier update noted the "bullish divergence" between the rising RSI line (see second blue arrow) and the falling price at the end of the year. It also pointed out the peak in the ADX line (see black arrow) which usually signals that the current trend (which in this case was down) was in need of some upside corrective action. I concluded in December that "if a dollar rebound does materialize in the new year, the horizontal line drawn under the 2004 lows should act as major resistance". That resistance line is at 85. The ability of the USD to move over its 50-day average the first week in January confirmed that a rebound had started. The daily chart is plotted through yesterday (Wednesday) when the Dollar Index closed at 83.52. It's trading higher again today. As you can see, very little has changed in its long-term trend. The first major test of the strength of the dollar rally will be whether or not it's able to move above the major resistance line at 85. And, as long as the dollar continues to rally, gold and gold shares will remain on the defensive.

Chart 2