DOLLAR PULLS BACK FROM TOP OF TRADING RANGE -- GOLD AND EURO BOUNCE OFF 200-DAY LINES -- XAU TESTING LONG-TERM TRENDLINE SUPPORT -- BOND YIELDS AND GLOBAL MARKETS DROP
DOLLAR INDEX BACKS OFF FROM RESISTANCE... The U.S. Dollar has established an intermediate-term trading range since the start of 2005 within a long-term downtrend. Chart 1 shows the Dollar Index (plotted through Friday) starting to back off from a test of its 200-day moving average and its February peak just over 85. The dollar is trading lower again today. The foreign currency most closely linked to the dollar is the Euro which is almost a mirror image of the dollar.
Chart 1
EURO BOUNCES OFF CHART SUPPORT... Chart 2 shows the Euro bouncing off chart support at its February low (green arrow) and its 200-day moving average (red arrow) and moving in the opposite direction of the Dollar Index. Its 9-day RSI line is bouncing from oversold territory near 30 (blue arrow). And its MACD histogram has just turned positive (green arrow). All of which suggests that the dollar rebound may be about done. One market that should benefit from a bounce in the Euro and new dollar weakness is the gold market.
Chart 2
GOLD BOUNCES OFF 200-DAY LINE ... As is usually the case, gold benefits from a weaker dollar and a rising Euro. Chart 3 shows that the Gold ETF (GLD) is also starting to bounce off its 200-day moving average. The Commodity Channel Index (CCI) is bouncing from oversold territory at -100 (top line). At the same time, the MACD histogram (which plots the difference between the two MACD lines) is close to turning positive. Gold stocks are also bouncing from an oversold condition. But the daily chart is much weaker than that of gold. Chart 4 shows the XAU Index having broken its February low and trading under both moving average lines. While that's not terribly encouraging for gold stocks, weekly and monthly charts show that the XAU Index is sitting on some long-term support lines.
Chart 3
Chart 4
MAJOR TRENDLINE SUPPORT FOR THE XAU? ... The weekly and monthly charts may be painting a more positive picture for gold stocks than the daily chart. The weekly bars in Chart 5 show the XAU testing a rising trendline drawn under several reaction lows starting in July 2002. The monthly bars in Chart 6 (which use a logarithmic scale) show the XAU testing a rising support line extending all the way back to the end of 2000. That doesn't mean that those trendlines will hold. But with the dollar backing off from resistance, and bullion bouncing off its 200-day average, this would be a logical spot for gold stocks to start stabilizing. Gold and gold stocks may also benefit from two other intermarket factors. One is the recent slide in the stock market which often pushes money into gold. The other is the pullback in long-term rates as stock market money has moved into the bond market. The drop in U.S. rates may be one of the factors hurting the dollar. Gold is helped by a falling dollar, but also by falling interest rates.
Chart 5
Chart 6
BOND YIELDS FALL ALONG WITH GLOBAL STOCKS ... The 10-year Treasury Note yield has fallen to the lowest level in nearly two months. Part of that is due to rising bond prices (which move in the opposite direction of yields) as money coming out of a falling stock market has moved into bonds. That tends to weaken the dollar (which has been helped by rising U.S. rates). Falling rates and a weakening dollar also makes gold a more attractive investment. The move into bonds and into gold isn't limited to the U.S. Global markets fell hard over the weekend. That's not surprising since global stock markets are closely correlated. One surprise (to me at least) was the nearly 4% drop in Japan. I'll take a look at that a little later today. In a stock market bear, global diversification doesn't work very well.
Chart 7
