Clive Maund
gold, silver, & oil shares
DOLLAR update - has the reaction about run its course?...
originally published July 20th, 2010It`s worth taking an updated look at the dollar here on account of its pivotal importance to just about everything. As you may recall we called the top in the dollar in June the day after it occurred. We then expected to see a larger bounce than we actually got off support in the vicinity of its 50-day moving average, but this support was broken dramatically by a big down day as the dollar broke down from a Head-and-Shoulders top. This H&S top is rather small as we can see on our 1-year chart and has measuring implications down to the 81 - 82 area - so we are close to arriving at a downside target for this move.
The reaction back as the euro has recovered has been quite steep so that the dollar is now approaching a zone of strong support in a deeply oversold state, as shown by the RSI indicator and Full Stochastic indicators on the chart. The larger trend must be considered to remain up with the 200-day moving average rising, and while the underlying support near the 200-day moving average is still some way beneath, we can see that there is a zone of strong support above this average that is just starting to come into play, arising from the upsloping trading range that developed from February through April. Taking all this into consideration the dollar is expected to mark out an intermediate base area in coming days and weeks above its 200-day m.a. that should turn it back up again, with a good chance of a serious rally getting underway within about 2 weeks.
We know that the long-term outlook for the dollar is very bleak indeed - after all it is the horribly abused currency of a country that is totally bankrupt, but that won`t necessarily stop it staging a significant rally over the medium-term, which is expected to be triggered by another 2008 style panic out of stocks as the next downwave gets underway, already signalled as likely by the now very negative Baltic Dry Index of shipping. We are also not unaware that we are deeper into the endgame than we were 2 years ago, with both the dollar the Treasury market approaching their nemesis. If this reasoning is correct, traders can look to play the expected dollar rally as the stockmarket tanks, but be ready to reverse positions as it shows signs of burning out, which of course will be the time when we will be looking to reinstate various positions in the PM sector. US subscribers in particular should seize the opportunity presented by any such dollar rally, which could be very substantial, to diversify out of dollar denominated investments.
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The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities.
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