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Sometimes, as traders, we need to stop and do a double-take,
especially when a long-depressed commodity or currency suddenly begins to
rise sharply. In the case of the US Dollar index (DX), there were most likely
thousands of double-takes, as disbelieving traders took a second, third and
even a fourth glance at this key currency’s daily and weekly charts.
Yes, this Dollar breakout appears to be the real deal, one destined to run
even higher in the weeks just ahead, and it might pay for us to invest a
little time now and see if we can anticipate the Dollar’s next area of
significant overhead resistance. Doing so might even help those of us who
plan to re-enter the Gold market (on a cash, ETF or futures contract basis),
hoping for a short-term bounce higher when the Dollar eventually meets up
with more formidable resistance. Let’s have a look at the weekly chart
of the continuous US Dollar Index futures contract (traded on the ICE
exchange) to see what technical clues are being offered to us right now.
 
US Dollar index
Graphics credit: Metastock v.11
The Dollar break seems to be carrying all of the proper technical credentials
that might allow it to morph into a major trend reversal (at some point),
Here are a few of them:
1. The weekly relative strength indicator (RSI (14)) is rising at a
very sharp angle of attack and is just a little below the 60 level; should it
increase beyond 60, it would be a substantial confirmation of a strong weekly
trend. Notice how the RSI was also manifesting a minor bullish price/momentum
divergence prior to the Dollar’s turn higher.
2. Since we all know that the price of the Dollar Index generally
moves inversely to the price of Gold, the fact that Gold was anticipated to
meet up with very strong weekly and monthly resistance near $1,200 (before
plunging by more than $100 over the past two weeks) also offered additional
confirmation to this recent Dollar up thrust
3. Notice how the Dollar Index formed a minor double bottom pattern
during early-to-mid 2008 (1B and 2B on the chart) before mounting a strong
bear market rally as the 2008’s giant commodity bubble was
disintegrating. Now look at the price level of the recent Dollar Index low at
about $74.21, which is nearly $4 higher than the dead low made during
2008’s double bottom. This means that a higher low has just printed,
which is also adding a substantial amount of bullish fuel to this Dollar
rally, especially since an up trend is, by definition, characterized by a
series of higher highs and higher lows.
4. Trader/investor sentiment in the Gold futures market (as
interpreted by way of recent Commitment of Trader (COT reports, put out by
the CFTC every week) had been exceedingly (and unrealistically) bullish among
large speculators (hedge funds) and small traders, suggesting that a
significant correction was imminent. Not surprisingly, the exact opposite
situation existed in the US Dollar Index’s COT sentiment interpretation
– the large speculators had only just begun to acquire fresh long
Dollar positions, meaning that the stage was being set for a complete
‘about face’ in both of these critical investment/commodity markets.
Presently, the Dollar Index appears to be making a beeline toward the
major resistance zone near $80.50, a full $3.20 above its current reading of
$78.195. This is an important area of resistance ‘confluence,’
meaning that two or more technical tools are in agreement that a particular
time/price area should act as a support/resistance (S/R) barrier. Those two
indicators include the Fibonacci 38% retracement of the major March 2009 thru
November 2009 downswing and the Keltner band mid-line (white curved line),
which happens to be a 45-week exponential moving average (EMA). Reasonably,
we can expect to see the DX at least pause and rest near that resistance, but
only time will tell if that will initiate a correction or a period of
sideways consolidation before continuing higher. Gold bulls should monitor
for strong areas of support in Gold (1090 –1070 on the weekly time
frame) if the DX reaches $80-$81, looking for possible daily-based long swing
trade setups in the yellow metal.
The broad US markets are also very vulnerable to a substantial decline
of their own, given that the S&P 500 index has been moving inversely to
the Dollar index for the past nine months or so. Should this inverse
correlation continue, and the Dollar index keeps on rising, savvy traders
might start to investigate the possibility of shorting the weakest stocks
from the weakest market sectors in the S&P 500 or Russell 2000 indexes.
Long-term, the abysmal fundamental outlook for the US Dollar
don’t seem likely to get much better, at least not until the flood of
deficit spending is brought under some semblance of control. However, the US
Dollar has already experienced two powerful bear market rallies since early
2005, and this current move certainly looks like it has the makings of rally
number three. It should be a very interesting New Year for both Dollar and
Gold Bulls!
By Donald W. Pendergast
Jr.
Contributing Market Analyst
www.EtfTradingPartner.com
Mark Brown
ETF Trading Partner
Mark Brown is an independent trader who focuses on
trading ETF funds. He has been involved in markets and money management since
1998. His unique trading model which uses a combination of analysis like:
economy, market cycles, chart patterns, volume, market internals, and money
management.
Visit his site: ETF Trading Partner http://www.ETFTradingPartner.com/
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