Bullion Action and the USD

We haven’t looked at the US Dollar in awhile so lets see what it’s been up to. 

Yesterday (wednesday 20) the dollar index opened at 80.51 on Wednesday morning in the Far East...and faded down to 80.28 around 3:00 p.m. in Hong Kong...and less than an hour before the London open.  From there, the dollar began to rally...and by 2:00 p.m. in New York it had made it up to about 80.81...and then jumped up to 81.10 following the Fed news.  From there it traded sideways into the close, finishing the Wednesday trading session at 81.05...up 54 basis points from Tuesday's close.

The dollar index rally was well under way before the high-frequency traders showed up in London just after the morning gold fix, so to hang yesterday's precious metals price action entirely on the currencies, is a stretch...and that's being kind.

It's my opinion that this was a manufactured rally so 'da boyz' could hide behind this fig leaf as they did the dirty in the precious metals...and that's certainly not the first time the've used this technique.

The first chart I would like to show you is a weekly bar chart of the H&S top pattern that everybody is focused in on at the moment. It does have nice symmetry to it and looks like the real deal. Please note the blue 5 point triangle on the right side of the chart where the current price action is strongly testing the top blue rail. As this triangle is forming below the H&S top we need to see a pattern that has at least 5 reversal points to reverse the downtrend to up. A breakout above the top blue rail will give us our first big clue that the potential H&S top will fail. Chart 1

Below is another way we can look at the price action from the Dollar high made back in July of last year. Some of you may recall the blue morphing triangle on the left side of the chart that broke out to the upside after a false breakout to the downside at point #6. We have a similar morphing triangle on the right side of the chart. If we start the triangle from the July top then it only needs to have an even number of reversal point to make it a consolidation pattern. I have to admit its not the prettiest triangle I’ve ever seen but the way the breakout and backtest is progressing it could very well be completing the breakout phase. We will know very soon if this is the case as the top blue rail will have to reverse it’s role and act as support on any pull back. Note the gold chart at the bottom. If the dollar does in fact breaks out of the 6 point triangle to the upside that will put alot of pressure on gold.

Lets look at combo chart 3 for the US dollar and gold. On the chart below with a brown shaded area and a blue shaded area based on the two red triangles on the dollar chart on top. What this chart shows is the inverse move that the dollar.and gold tend to make. You can see that when the red triangle on the left side was building out gold moved up to point #4 on it’s rectangle and when the dollar finally broke out to the upside gold corrected down to point #5 at the bottom of the rectangle. This is where it gets interesting. 

Note the red triangle on the right side of the dollar chart that is getting real close to breaking the top rail. If the US dollar breaks out above the red rail that will put serious pressure on gold that will break the bottom red rail of it’s small downtrend channel. And if the dollar has a strong move up the blue bottom rail of gold’s big rectangle will be in jeopardy which would be a serious blow to gold if the bottom blue rail ever gives way. A break of gold’s bottom blue rail of it’s rectangle would then turn from support to resistance on any backtest. So we have plenty to watch over the next week or so. 

Stay tuned

By Rambus