Week Ending 3/12/10
The following excerpt is from the currency section of the latest full-length market wrap report, available on the Honest Money Gold & Silver Report website. All major markets are covered: stocks, bonds, currencies, and commodities, with the emphasis on the precious metals - the only secular bull market existent.
Before getting into the analysis of the dollar and the euro, I'd like to show a few charts of the inter-market relationships between gold, the dollar, and the euro.
Please note that these charts show correlations of inter-market relationships, neither of which implies causality. Just because two assets are trending in the same direction, it does not mean that one causes the other to do so: correlation is not causality.
The first chart shows the inverse relationship between the dollar and gold. When the dollar moves up, gold moves down. When gold goes up, the dollar goes down.
Recently, gold has been advancing in the face of a rising to sideways dollar; until the end of the week, as we will soon see. On Friday the dollar fell and gold fell as well. This was a bit disconcerting and warrants attention, especially if it continues.
Up next is a chart comparing gold and the euro, which have a positive correlation: they trend in the same direction.
When gold goes up, the euro goes up; and when the euro moves down, gold moves down. Notice the most recent price action on the chart.
The euro fell quite hard, yet gold traded sideways to up. Gold exhibited good relative strength.
On Friday, however, the euro rallied, yet gold fell, which is another warning flag to be aware of.
It may mean nothing; or it could mean a whole lot. We should know soon enough.
The chart below shows the dollar and the euro as mirror images of one another: they trend in the complete opposite direction. When the dollar falls, the euro rises; and when the euro falls, the dollar rises.
Last week the dollar and the euro pretty much stuck to their previous inter-market relationship - trending opposite to one another.
Gold, however, did not maintain its usual relationship with either the dollar or the euro. This bears watching.
Once again, this may just be a short term anomaly that quickly resolves itself; or it could be a warning that something is changing. At the least - it warrants our attention.
Due to Greece's and other EU member's sovereign debt problems, the euro has come under intense selling pressure, which in turn has put support under an overbought dollar.
The dollar has been reluctant to give ground, but it did so Friday, and the euro rallied nicely. Now, it remains to be seen if the currencies continue in the same directional pattern; and whether gold falls in line or not.
It was disconcerting to see gold fall on Friday, while the dollar was falling and the euro rallying.
Normally, gold would be up under such conditions, so we need to remain alert to see if this was a one day affair or something more.
Up next is the daily dollar chart (UUP). It shows Friday's big gap to the downside. Price is sitting right on top of support offered by the 38% Fibonacci retracement level (23.39) marked in blue. This area may act as a short term support area, which could lead to a quick move up.
Also, on the chart is a second set of Fib numbers (red), rising from the Dec. low to the recent high (23.87). Notice that the 38% Fib retracement level of this red series overlaps with the 50-60% Fib levels of the blue series.
Such intersecting Fib levels can mark important support and resistance areas. I suspect that this level will be tested during the dollar's correction - on an intermediate term basis. Short term anything can happen.
Notice that STO has not yet penetrated below 20, which suggests more downside is likely; however, CCI at the bottom of the chart has already entered oversold territory. Thus the signals are mixed.
Next up is the daily euro chart. It shows the steep fall from the Dec. high near 151, down to the March low around 135. The euro has been carving out a bottom for the last month or so.
Friday's gap up is already bumping into short term resistance offered by its falling trend line (138).
If the euro can break above the falling diagonal trend line, it would open the door for a rally back to its 38% Fib retracement level at 141. This would be gold friendly if it occurs.
There are a lot of players short the euro, so there remains the possibility of a short covering rally that could be quick and violent. So far, the recent gains do not suggest such motivation was behind the move; nor immediately forthcoming.
The CCI index at the bottom of the chart is entering into overbought territory. If CCI starts to recede back near 100, caution will be warranted.
In today's turbulent times of financial crisis gold and silver are more important than ever. Presently, the precious metals and other markets are at crucial inflection points. Which direction the dollar and the euro take will have major implications on all markets.
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