EURO JUMPS ON TALK OF RATE HIKES -- DOLLAR BACKS OFF FROM RESISTANCE -- GOLD NEARS UPSIDE BREAKOUT -- ROTATION OUT OF ENERGY AND HOUSING INTO GOLD CONTINUES

EURO BOUNCES OFF JULY LOW ... The Euro is bouncing strongly off chart support at its July low as shown in Chart 1. Aside from technical considerations, there were two main catalysts behind today's jump. One is a statement from the president of the European Central Bank that it may be ready to raise European interest rates for the first time in five years. The second catalyst was a positive statement on the recent German political stalemate. With U.S. rates climbing and European rates staying flat, the differential between the two has been widening. That favors the dollar. Any move by the Europeans to narrow the differential works for the Euro and against the dollar. Chart 2 gives a longer-range view of the Euro and shows that it's also in an area of support formed during the first half of 2004. The 9-week RSI has already turned up from oversold territory under 30. A bottom in the Euro would probably coincide with a top in the dollar.

Chart 1

Chart 2

OVERBOUGHT DOLLAR BACKS OFF FROM RESISTANCE ... The daily chart of the U.S. Dollar Index is almost a mirror image of the Euro. The daily bars in Chart 3 show the USD starting to back off from chart resistance formed during July just above 90. There's another reason why the 90 level represents a significant barrier. The weekly bars in Chart 4 show that level also contained rallies during the summer of last year. From a charting standpoint, this would be logical spot for the dollar to experience some profit-taking. Although the recent link between the dollar and gold hasn't been that strong, dollar selling would most likely attract even more money into the gold sector. That may explain today's big jump in the price of bullion. Gold stocks are also bouncing.

Chart 3

Chart 4

GOLD NEARS ANOTHER UPSIDE BREAKOUT... Yesterday I wrote about how gold was consolidating between $475 and $460 on the way to its next upside target at $500. From the look of the daily bars in the Gold ETF (GLD), gold may be about to resume its uptrend sooner than expected. Gold is trading $7.00 higher today. It's also worth noting that gold (and gold stocks) are rising while the price of oil (and oil stocks) are falling. A couple of weeks back I suggested some rotation out of energy shares into gold shares (September 16, 2005). The ratio between the two groups continues to favor gold.

Chart 5

GOLD/ENERGY RATIO BREAKS 200-DAY AVERAGE ... Chart 6 is a relative strength ratio of gold stocks (the XAU Index) divided by the Energy Sector SPDR (XLE) from the start of 2005. The falling ratio during the first half meant that oil stocks were stronger than gold stocks. After forming a "double bottom" in August and September, however, the XAU/XLE ratio turned up suggesting a rotation away from oil stocks into gold. With gold stocks now rising, and energy shares falling, the ratio is trading over its 200-day moving average for the first time this year. That suggests that the move out of oil and into gold has staying power. The September 16 article also recommended rotating out of housing stocks into gold. Chart 7 shows that the ratio of gold stocks (XAU) to housing stocks (HGX) continues to rise well above its 200-day average. Gold is benefiting from rising inflation expectations and loss of confidence in bonds and stocks. It may also start to benefit from a weaker dollar.

Chart 6

Chart 7