This essay is based on the Premium Update posted October 23rd, 2009.

Precious metals moved lower this week, which was accompanied by a decline in the general stock market and a small rally in the USD Index. The situation in the main stock indices is still rather unclear, so this week I would like to point your attention to the U.S. Dollar as it provides clues invaluable to anyone involved in the precious metals sector. After all, there is a clearly visible negative correlation between USD Index and gold, silver and PM stocks.

Let's begin with the chart (charts courtesy of http://stockcharts.com) featuring the USD Index in the medium term, and after that I will move to the short-term analysis.

The U.S. Dollar is trading in the area marked with a red elllipse, as I indicated a week ago, and has been mostly trading in its lower part. This, however, changed this week, as USD moved higher, to the upper part of the ellipse, and touched its resistance near the 76 level. Consequently, we have seen precious metals move lower.

The RSI indicator is moving toward the 50 level, which marked local tops since June. Will history repeat one more time? It's impossible to tell, but given the reliability of this particular signal in the recent past it is likely.

Taking the shape of the recent downswing into account may suggest that the USD Index is now near breaking out to the upside, but before going long this market, please note that until the breakout takes place, the trend remains down.

The short-term chart reveals that apart from the support and resistance levels that suggest that USD is to trade sideways for several days, there is one more interesting pattern that is worth analyzing. I'm referring to the short-term seasonal tendencies that have been in place in the past several months - I've marked them with black, vertical lines on the above chart.

The remarkable fact here is that since June, more or less the beginning of each month marked some kind of extreme on the dollar market. Most times it was bottom after top, and top after bottom, but two previous times marked local tops, so it is difficult to tell which of these two extremes is more likely to take place at the beginning of November. This, however, does not mean that this observation is totally useless.

As I stated earlier, once we decisively break below the 75 level, the value of the U.S. Dollar is likely to move much lower (possibly below the 72 level) as there are no strong support levels between these two values. Since there is very little time before the end of October, and USD did plunge yet, I don't expect the big move to take place this month. This, combined with the previous analysis implies that either a top / bottom is likely to take place in a week or so, but it is likely to be a local one. By that I mean the price action similar to what we've seen in the last weeks of September.

Therefore, if it is a local bottom that is to take place, it means that a small rally would follow, that would ignite a correction in metals - meaning that a local top in USD would be put several days later. If a local top is to emerge, then the metals are likely to correct even sooner. Consequently, although it is not clear what is most likely to happen in the USD Index, the implications for the precious metals are that they correct rather soon, or even sooner, which is in tune with what other charts suggest at the moment. Based on the price action from the beginning of this week, it seems that the correction in the precious metalst is underway.

Summing up, the trend for the U.S. Dollar remains down, which is a positive factor for the precious metals market in the long run. However, from the short-term perspective, it seems that gold, silver, and corresponding equities need to take a breather to correct their post-$1,000-breakout rally. This is likely to correspond to a consolidation in the USD Index, which will probably take place at least for several more days.

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Thank you for reading. Have a great and profitable week!