When markets are volatile it often pays to take a step back and look at the big picture. A monthly chart shows the Dollar Index ranging between 70 and 90 since 2003, with the 80 level alternating as mid-range support/resistance. The index recently pulled back from resistance at 80 and will now either re-group for another attempt or medium-term support will give way, signaling a test of long-term support.
Zooming in to the daily chart shows narrow consolidation above medium-term support at 76.50. Breakout above 77.60 and the descending trendline would signal another test of 80, while failure of support at 76 would mean a decline to 73.50*.
* Target calculation: 76.5 – ( 79.5 – 76.5 ) = 73.5
In the long term, breach of 73.50 would test 70, while breakout above 80 would signal an advance to 90. If support at 70 fails, gold will rocket through $2000/ounce, but that is only likely to occur if the Fed rolls out QE3.
