BullMarketRun.ca

The United States is a nation that has lost its way.  The country has turned its back on its founding principles and is now saddled with enormous debt and levels of government intrusion into the economy and the lives of its citizens that not long ago would never have been imaginable.  The upcoming Congressional elections are likely going to be a total disaster for the Democrats with the Republicans regaining control of the House and perhaps even the Senate, but this doesn’t mean America’s problems will be fixed anytime soon.  Washington is broken.  Putting it back together will not be easy and it certainly won’t happen under the United States’ version of Pierre Trudeau in the White House.

The state of the U.S. Dollar reflects the mess the United States is in and has been a significant contributing factor in Gold’s recent surge.  Given the awful fundamentals at play, the overall outlook for the U.S. Dollar is negative which supports our contention that Gold and commodities in general are headed significantly higher in the months ahead.

Tonight we take a fresh look at the U.S. Dollar Index for the immediate future from a technical perspective.  BMR’s Technical Analyst, who correctly predicted support recently for the Dollar Index at the 76 level, outlines below how he sees the Index not being able to advance beyond 79 on any rally with a new yearly low on the horizon of just under 75:

John: Tonight we look at the U.S. Dollar Index in Part 2 in our 4-part series of Indexes and the Gold Sector. The Dollar Index is a method of determining a relative value for the U.S. Dollar in terms of a weighted basket of other currencies – the Euro, Canadian Dollar, Japanese Yen, Swedish Krona, British Pound and the Swiss Franc.

Looking at the weekly chart of the Dollar Index, we see that from a high of 89 in the 2nd week of June, 2010, it fell for 9 consecutive weeks to a value of 80.  It then rebounded in just 1 week to 83.  Then for the following 4 weeks it traded between 82 and 83.5.

On the above chart there are Fibonacci levels (blue) shown for this 9-week downtrend and note that the retracement was to the 61.8% level. Then an “Evening Star” candle pattern formed, signaling that the retracement was over and for 7 consecutive weeks the Index continued to drop until it reached support last week at the 76 level.

Last week formed a “Southern Doji” candle. The position of this doji at the end of a decline and at support indicates the strong probability of a reversal. However, I fully expect the retracement to go up no higher than the Fibonacci 61.8% (green) level, shown at 78.95.

There appears to be a strong support band between 74.5 and 76.  The target level from the blue Fibonacci levels is shown as 74.74 which coincides with the support band.

Looking at the indicators:

The RSI is oversold at 20% and is flat – ready for a retracement.

The Slow Stochastics has formed a “W” formation with the %K (black line) at 8%, above the %D (red line) at 5% and pointing up – ready for a retracement.

The ADX trend indicator has the -DI (red line) above the +DI (green line) but has reversed and is now pointing down, thus getting weaker. I expect the ADX (black line) – the trend strength indicator – to flatten in the near future now that the -DI has peaked and reversed.

Outlook: Over the next few weeks I expect the Dollar Index to climb no higher than the Fibonacci 61.8% level (green), then reverse and continue down to the Fibonacci (blue) target of 74.74.