Technical Update of the US Dollar...Fate for Gold Discussed

By: David Petch | Thu, Sep 13, 2012
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The following article was presented to the benefit of subscribers on September 12th, 2012. Rather than mimic a few previous articles I have penned, this one will focus on technical analysis of one Index, with interspersed commentary fitting to what is observed. The most interesting part I found from all of the analysis is how well the Elliott Wave pattern of the US Dollar Index matched initial expectations. At the end of the article, it is hoped that the reader has a better understanding of how economic situations unfolding over the next 8-12 months are going to ultimately hinge on the path of the US Dollar.


Currencies

The daily chart of the Canadian Dollar Index is shown below, with the move up yesterday having a price excursion beyond the 21 and 34 MA Bollinger bands, suggestive that a short-term top was put in place. Given the depth of the lower 55 MA Bollinger band, it will take 4-5 weeks of sideways to mildly downward price action before the Loonie heads higher. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 3 and beneath the %D in 3. Even though the Loonie registered an overbought reading with an excursion beyond Bollinger bands, it appears further upward price action could persist for another 5-10 trading days. The situation with the US Dollar Index declining so hard so fast indicates that a potential rally is looming, which will be a temporary set back for commodity prices and the broad stock market indices...this will be a pause as they put in new 542 week highs between December 5th and March 6th 2013. Our target for the Loonie sometime between April and August 2013 is $1.15-1.18. This is a double edged sword for the US...it allows greater number of exports to be made, which boosts jobs, yet incoming item such as energy, food and other goods etc. rise by a certain cost. This is a silent tariff in many regards because blame can be shifted to currency valuations for reasoning behind other countries having a lag in their exports. As mentioned before, the broads top out first, followed by commodity indices (HUI, XOI), commodities (gold, silver, oil) and finally, the US Dollar Index bottoming sometime between June and late August 2013.

Figure 1
$CDW Chart
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The daily chart of the Australian Dollar Index is shown below, with upper 21 and 34 MA Bollinger bands in close proximity to each other, with a noted gap off the lows from earlier this month. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. The dollar from down under is around 4-5 weeks ahead of the Loonie with respect to bottoming....it is possible that the XAD corrects alongside other currencies in 2-3 weeks time, but it will simply be building a base for higher highs. Our target for next year with the XAD is $1.18-1.21...this fits in line with this currency being generally stronger than the Loonie.

Figure 2
$XAD Chart
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The daily chart of the Euro Index is shown below, with the recent price action having an excursion above all three upper Bollinger bands, suggestive that a short-term top was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in all three instances. Stochastics are near the upper portion of their range, indicating that a correction is looming. All three currencies shown set for a correction strongly suggest a rally in the US Dollar Index is looming. Since the extension of the Elliott Wave count did not follow through and 81.0 was broken (mentioned as key support a few weeks ago), the short-term mechanics of the market also changed. Expect weakness in the broad stock market indices beyond September 20th, lasting nearly 2/3 of October. This will set the stage for things to develop as expected. The wave of inflation we are going to experience for the remainder of this year and into mid 2013 could be stronger than any of us ever could anticipate. Key measures for determining when a top is put in place will be looking for expected pricing levels in gold ($2500-3074/ounce), oil ($160-180/barrel), silver ($65-85/ounce) and a US Dollar low (71-73). When these levels begin to be touched, it will be time to exit energy and precious metal stocks. Do not forget that the broads are likely to top between December 5th 2012 and March 6th 2013...biotech stocks are poised for a breakout, which are likely to have an upward trend running alongside precious metal stocks. As seen over the past few weeks, a slight change in what happens with the US Dollar can have immediate implications...this will be extremely important to follow as we near our expected topping dates for exit from positions.

Figure 3
$XEU Chart
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US Dollar Index

The daily chart of the US Dollar Index is shown below, with recent price action having an excursion beyond all three lower Bollinger bands, suggestive that a bottom was put in place or is looming. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. The US Dollar has been down hard for 6 weeks, which strongly suggests that a bottom is looming, with an expected partial retracement somewhere between 80.5-81.0. Nothing in the stock market is "As the Crow Flies", so expect a downward spiralling trail with bends in the road...one of those upward bends is expected within the next 5-10 trading days.

Figure 4
$USD Chart
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The weekly chart of the US Dollar Index is shown below, with upper Bollinger bands above the current price, suggestive that a top was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and 2 and above the %D in 3. Extrapolation of the %K in stochastics 2 and 3 suggest anywhere from at least 9-12 months of further sideways to downward price action before a bottom is put in place. Initial support in the US Dollar Index will be found between 72.5-73....chances are a pause for 2-3 months occurs in this area before breaking lower (likely remain above 70) for this down leg expected to bottom sometime between June and late August 2013.

Figure 5
$USD Chart
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The monthly chart of the US Dollar Index is shown below, with lower 21 and 34 MA Bollinger bands in close proximity to each other beneath the index. As mentioned for the past 6 months, this Bollinger band setup would either have an upward trend like 1996 or a downward trend much like 2006. With the Elliott Wave count developing over the past 4 years, it strongly suggests that a 2006 style of decline will be experienced (given nearly 4 years of sideways price action that must be resolved to the upside or downside. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. Although stochastics are not revealing at present, technical analysis on the daily, weekly and Elliott Wave counts suggest a break to the downside...this has been confirmed with the strength of the downward trend of the US Dollar the past 6 weeks.

Figure 6
$USD Chart
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The short-term Elliott Wave count of the US Dollar Index is shown below, with wave [E] recently completing. Due to the structure of the count, there was the possibility shown below, or the preferred count at the time which had a wave C that was to have started around mid-August. Since 81 .0 was taken out, the count shown below accurately reflects what is going on. Surprisingly, the green pattern drawn in place back in June turned out to be a rather accurate reflection of what actually happened. Given the depth of the recent decline, look for a retest of the 81.0 level to occur over the coming 3-5 weeks before any sort of partial retracement top is put in place. If the US Dollar declines further without participation of rising prices in gold and silver, a sharp correction could be in store for early October before the broad stock market indices rally to new highs later this year. The 4 year triangle pattern is now complete, with the start of the new downward trending pattern expected to last anywhere from 5-8 years...please note that if an expanding triangle develops as expected, then volatility will be extreme and I mean EXTREME.

Figure 7
USD Chart
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The mid-term Elliott Wave count of the US Dollar Index is shown below, with the thought pattern forming denoted in green. Wave [E].b of a triangle forming since 2008 is now though to be complete, with wave [A] of an expanding triangle though to be forming for wave c. With triangles, the downward break potentially could be as long as wave [A] or up to 1.25x the length. This in theory could see the US Dollar Index bottom around 66-68 before bottoming. I do not see the 70 level being taken out during this leg down, but expect the unexpected. We could see $2500/ounce gold with a US Dollar at 70.0, but a break to 66-68 would see $3074/ounce. The prerequisites for pricing action in gold has been laid, now we must wait and see what happens.

Figure 8
USD Chart
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That is all for today...have a great day and back tomorrow with an update of gold and related ratios...there are some important observations in relation to gold expectations over the next 8-12 months, alongside further info regarding its lower order Contracting Fibonacci Spiral (dates included).

 


 

David Petch

Author: David Petch

David Petch
TreasureChests.info

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at http://www.treasurechests.info.

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