Wednesday, July 4, 2007

My Weakly US Dollar Chart

All charts courtesy of StockCharts.com


I am posting another chart of the USD index because I feel that it is at an important juncture. I believe that what goes on in the chart below will ultimately determine the future path of gold and gold stocks. I am also posting my weekly chart of the USD because it illustrates several interesting technical formations that can be learned from.


I have read many books on trading currencies, and what many of them say is that the Forex market is one of the most technically oriented markets there is. I have found this to be true, and I think my USD chart above lends some evidence to this claim.

The first thing to notice in the above chart is the beautiful head and shoulders pattern that formed in late 2005. The breaking of the neckline led to a precipitous decline that lasted until May 2006. Remember, as well, that during this time, gold was on fire until May 2006.

The second thing to observe in this chart is the giant triangle I have drawn with blue lines. The US Dollar has, like clockwork, been contained within these lines for more than a year. The bouncing off of these lines gave excellent entry points for the gold market. Since the triangle is close to reaching an apex, a move of great magnitude could be in the cards.

The third thing to notice is that the USD is close to long term support, as marked off by the red horizontal line. This red line is key. This red line goes back decades, and if it is ever broken, it will mark an all time low for the USD, and could lead to a major breakdown for the index.

In my opinion, the USD index will eventually break this long-term support, since the USD is in a powerful downtrend, and it never pays to buck the trend. However, on the daily chart, the USD is oversold, which means that another small bounce is likely, so I would not say that a break in the long term support is going to happen right away. I suspect that there cannot be a large move in gold until this weekly USD chart breaks down. Personally, I have half my money invested in XGD right now, and I think I'll keep the other half for when the USD breaks support.

2 comments:

Anonymous said...

Hi Danny,
Observed on the daily GLD chart that the top yesterday was the "old resistance line." Do U C anything to indicate what's next? BTW I like Goldcorp.
Archie

Danny Merkel said...

Hello Archie,

Thank you very much for the comment. You are absolutely right with your observation on GLD, and I will annotate my chart so that it reflects what you said.

On Friday, gold stocks surged on heavy volume, and to any technical analyst this would be bullish.

However, my intermarket analysis is not so bullish. The Daily US Dollar Chart is nestled right on some major support, which I labled S1, and is also oversold. I will not be an outright bull on Gold Stocks until this support is taken out.

In addition, if you look on my page entitled "An Alternative Method" you will notice that July 9th is the date of what I call an astrological event. This could potentially cause a change of trend in Gold Stocks.

In terms of Gold Corp, I cannot really comment on that, since I never do any research into what gold stocks are better than others. I just deal with Gold ETFs that have a basket of gold stocks. I believe that the ETF I deal with has about a 20% weighting in Gold Corp.

Anyway, thanks again for the comments, and please keep in touch.


-Danny