Week Ending 12/18/09
The following excerpt is from this week's full market wrap report (34 pgs), available only at the Honest Money Gold & Silver Report website. All major markets are covered, including stocks, bonds, currencies, commodities, and the precious metals (36 charts). Stop by and request a free trial subscription or email firstname.lastname@example.org.
The action this week was in the currency markets. Moody's downgrade of Greece's sovereign debt put pressure on the euro, while supporting the dollar's rally.
Hot money flows can sustain or reverse a trend in motion. Currency flows have weighed heavily on the gold market, which moves in line with the euro, and inversely to the dollar, as the chart below shows.
Next up is the weekly dollar chart. Price is bumping up into overhead resistance at 78, as the yellow horizontal trend line indicates. During November the dollar made a higher low, as support from the 2008 low held. This was the first hint a rally was likely.
MACD has made a positive crossover. Both the histograms and RSI have turned up. The weight of the evidence suggests that further upside potential exists - if the dollar can close above the 78 resistance level. The 38% Fibonacci retracement level at 80 is the next target, if resistance is broken through and confirmed.
The daily chart of the euro shows serious technical damage, which will take time to repair. The euro has been in a rising channel for months. However, price reversed and sliced through lower trend line support at 148 without hesitation.
Overlaid on the chart are the Fibonacci retracement levels coming out of the April low. Since the beginning of Dec. the euro has fallen to its first Fib retracement level near 143.
If support doesn't hold here, the next target is the 50% level near 140. Both RSI and CCI are oversold, but they can remain oversold for a lot longer than one would think reasonable. An oversold bounce would be of no surprise.
Precious metal stocks continued down, losing -3.20% for the week, as measured by the GDX index, which closed at 46.29. Since making its early Dec. high, the GDX has fallen about 16%.
In Nov. there were some who said the risk to gold stocks was the risk of not being fully invested. I respectfully disagreed and the reasons are unfortunately evident.
The daily chart shows price falling in early Dec., followed by a sideways consolidation. GDX then sliced through its 38% Fib level, and is quickly approaching its 50% retracement zone (44).
Friday saw a nice bounce up, as support held, at least so far. All eyes remain on the dollar and the euro for signs of direction.
Next up is the weekly GDX chart with the Fibonacci retracement levels coming out of the 2008 lows. Measuring the entire rally since the 2008 lows gives the 38% Fib level at 40.40. Several factors enter the mix:
- Strength/weakness in short term interest rates
- Strength/weakness in the dollar
- Strength/weakness in physical gold
- Strength/weakness in the overall stock market
If all four factors line up on the wrong side, the pm stocks will have a difficult time. The operative words being: if and all. From last week's commentary:
Since its closing high of 54.78 on Dec. 2, the GDX has lost about 12%. Price is presently testing support. If the gold stocks don't hold here, the next target is the lower diagonal trend line at 46.
Support didn't hold and the GDX dropped and is now testing lower diagonal support at 46, as evidenced by the following chart.
Although the trend is up for the overall stock market, there is substantial evidence that this is still a bear market rally and that an important inflection point may be close at hand.
The dollar rally we have been expecting is finally here, but it is short term overbought. Back in April we called for a $1300 upside target for gold if the inverse head & shoulder formation broke out, which it did.
Regular readers know that warnings of gold's reaction to a dollar rally have been discussed in these pages for months. We have also been leery of pm stocks as they were approaching their recent highs.
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Good Luck. Good Trading. Good Health. And that's a Wrap.