The weekly chart of the US Dollar Index ($DXY) shows retracement to test the new support level at 76.00 after the recent breakout. Respect of support would confirm the breakout and reversal to a primary up-trend. Failure would warn of a bear trap. Reversal of 63-day Momentum below zero would also indicate continuation of the primary down-trend. A lot depends on the outcome of this week’s FOMC meeting.
* Target calculation: 76 + ( 76 – 73 ) = 79
A false break below $1800/ounce indicates buying support at the rising trendline. Breakout above $1900 would complete an ascending triangle with a target of $2100*. Reversal below Friday’s low would warn that the pattern has failed and correction to the long-term trendline (around $1500) is likely.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
The long-term chart below gives a clearer picture of the current bull-trend. Spot prices spiked up 20% in a matter of days after the collapse of Lehman (LEH), but declined back to $700/ounce within a few weeks. The up-trend only started in November 2008, when the Fed announced that it would purchase mortgage-backed securities and Treasurys in an attempt to lower long-term interest rates (QE). The trend accelerated in 2011, several months after commencement of QE2. While collapse of Lehman was the underlying cause, the bull-trend is a reaction to the Fed response of quantitative easing. Further purchases of Treasurys or MBS would lift demand for gold. Hopefully Wednesday’s FOMC announcement will provide more clarity as to the Fed’s intentions.
The pound, affected by euro fallout, broke support at $1.59 to signal a primary down-trend. Expect a test of its December 2010 low at $1.53*
* Target calculation: 1.60 – ( 1.67 – 1.60 ) = 1.53
Flight to safety weakened the Australian Dollar which broke support at $1.04 against the greenback. Expect another test of parity. 63-Day Momentum crossing below zero warns that the primary up-trend may be reversing. Breach of support would confirm.
* Target calculation: 1.05 – ( 1.10 – 1.05 ) = 1.00
The Aussie Dollar is also testing support at $1.25 against its Kiwi partner. The primary trend is down and follow-through below $1.245 would indicate a down-swing to the lower trend channel over the next few months.
* Target calculation: 1.24 – ( 1.28 – 1.24 ) = 1.20
The euro found short-term support at $1.35 against the greenback but is now weakening. Failure of support would confirm the target of $1.30*. A peak below zero on the 63-day Momentum oscillator would confirm the primary down-trend.
* Target calculation: 1.40 – ( 1.50 – 1.40 ) = 1.30
The falling euro strengthens the US Dollar Index which broke through resistance at 76.00. Breakout completes the base which has been forming over the past 5 months. Retracement is likely; and respect of the new support level at 76.00 would confirm a primary up-trend, while failure would warn of a bull trap.
* Target calculation: 76 + ( 76 – 73 ) = 79
The strengthening dollar caused crude prices to soften, with Brent crude headed for another test of support at $104/$105 per barrel. Failure of support would warn of a down-swing to $90, but breakout above the descending trendline is equally likely and would suggest a new primary advance.
* Target calculation: 105 – ( 120 – 105 ) = 90
The spread between Brent and Nymex WTI crude narrowed to $20. An increase in supply from Libya or Nigeria would help to lower Brent prices further.
Amex Gold Bugs Index broke through long-term resistance at 600 last week and is now retracing to test the new support level. Respect of 600 would confirm a primary advance to 700* — a bullish sign for spot gold prices.
* Target calculation: 600 + ( 600 – 500 ) = 700
Gold is rising in a super-trend which has lasted for more than 10 years. The primary trend, however, is accelerating as the debt crisis in Europe evolves. European banks are now in a precarious position and default of a single debtor nation would cause a crisis of confidence. The situation is similar to the 2007 sub-prime crisis which was accompanied by a similar surge in demand for gold.
Two events stand out. In March 2008 the Fed rescue of Bear Stearns reassured the markets, easing demand for gold and resulting in a 30% retreat in the spot price from its peak at $1000/ounce. The second event was the September 15th collapse of Lehman Brothers. Gold surged 20% in a matter of days, as confidence in the Fed’s ability to contain the crisis was shaken, before settling back at $700 by November. It then commenced the current bull run, climbing 170% so far from its 2008 low.
The question is: are we facing a “Bear Stearns” event that will reassure financial markets or another “Lehman”, causing a flight to safety? Current European dis-unity suggests a crisis of confidence and surge in demand for gold.
The daily chart shows a bullish ascending triangle, indicating further accumulation. Breakout above 1900 would signal a fresh advance to 2100*.
* Target calculation: 1900 + ( 1900 – 1700 ) = 2100
The situation can change rapidly, however, and some contrarians believe that gold is over-bought. Reversal below support at $1800 would break the ascending pattern and rising (secondary) trendline. All bets are then off and reversal below $1750 would complete a double top, threatening correction to $1500.
“China is a poor country with only $4,000 per capita income,” Yu Yongding, a Chinese top economist and former member of the central bank’s monetary policy committee said in an interview in China. “To talk and think about China to rescue countries with $40,000 per capita incomes is ridiculous.”
China is ready to help, Mr. Yu said, “but European countries first should show that they have a clear road map and convincing policies to preserve the euro and solve their problems as well as the political will to make necessary sacrifices.”
via Europe Is Urged to Take Bolder Action on Debt – NYTimes.com.
