DROP IN OVERBOUGHT DOLLAR BOOSTS GOLD AND XAU INDEX -- RISING OIL SUPPORTS STRONG ENERGY SECTOR -- BAKER HUGHES BREAKS OUT -- BASIC MATERIALS ARE ALSO STRONG

GOLD ETF BOUNCES ON VOLUME ... The Gold Trust Shares (GLD) are bouncing impressively today off their 200-day moving average. And they're doing so on very strong volume. Chart 1 shows that today's up volume is the heaviest in more than two months. The daily oscillators are also turning up from oversold territory. The 9-day RSI shows a "positive divergence" on the last price dip. That's usually a prelude to a bottom. Daily stochastic lines are turning up from oversold territory under 20.

Chart 1

GOLD STOCKS BOUNCE OFF TRENDLINE SUPPORT... The Gold & Silver (XAU) Index is up more than 3% today and is the market's strongest group. Chart 2 also shows a positive divergence on both the daily RSI line and the MACD lines. More importantly, the XAU is bouncing off a rising support line extending back almost two years (see Chart 3). That makes this an important support zone. As is normally the case with gold, today's rally is coinciding with selling in an overbought dollar.

Chart 2

Chart 3

DOLLAR IS OVERBOUGHT ... The dollar is weakening today against major foreign currencies. Part of the reason has to do with the fact that its 9-day RSI line has reached overbought territory over 70 (see arrow). Another has to do with its current price level. Last Thursday, I wrote that the Dollar Index was "nearing a test of major resistance at 85". Chart 5 shows why. In any rally, the first significant resistance barrier is a previous low. That low took place at the start of 2004 at 85 (see arrows). That makes 85 an important resistance barrier. So we have an overbought dollar pulling back from overhead resistance at the same time that oversold gold and gold stocks are bouncing from underlying chart support.

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Chart 5

BASIC MATERIALS AND ENERGY ALSO CLIMB... Gold isn't the only commodity rallying today. Crude oil has jumped over a dollar and is helping make energy stocks the day's top sector. Basic material stocks are also showing good relative strength. The Materials Select Sector SPDR (XLB) is bouncing off its 50-day moving average today. Its relative strength has been rising. Two of the stock leaders are gold related -- Newmont Mining and Freeport McMoran Copper & Gold. In the oil service group, Baker Hughes is having a good chart day. Chart 7 shows the stock breaking through its fourth quarter highs. That's especially bullish for the Oil Service Holders (OIH) since BHI is the biggest holding in that energy ETF.

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