Consolidation or Trend Reversal in USD & Gold?
Source: Jeb Handwerger, Gold Stock Trades (11/25/10)
"Important inverse relationship is continuing between the USD and gold."
In a recent article, I wrote about important trend changes in the dollar and gold.
An important inverse intermarket relationship is continuing between the U.S. dollar and gold. They have both broken trendlines simultaneously and are threatening a countertrend move. Other than yesterday's spike on a conflict in Korea, the dollar and gold have moved inversely and one appears to be bottoming while gold threatens to make a topping pattern.
Most traders use trendlines to determine when a trend changes, but many forget to follow that important line after the break has occurred. Smart traders have been monitoring the extended trendline on the dollar and gold this past week. It will be used to determine if this trend reversal is confirmed or if there is a chance of a technical failure. A failure occurs when price reverses back below the line. This creates an exhaustion point. It is crucial to monitor for these patterns. A failure did not occur in the dollar, as it has bounced higher on geopolitical fears in Korea, rising rates in China and Eurozone Bailout Concerns. This trend may continue higher which may limit golds upside targets.
An extended line reverses its role of either support or resistance. In the case of the dollar, the downtrend line acted as resistance or a "ceiling" on the price. Last Tuesday, it was broken to the upside. After Tuesday, the U.S. dollar has found support at the 50-day moving average and its new support, the extended trendline. It is important to know that traders have monitored this technical level closely and the extended trendline has proven to hold support. This signifies the dollar may have much further to run. This could also signify pressure on precious metals in relation to the U.S. dollar as a trend has been broken and a break of October lows could confirm a potential head and shoulders top.