A steeply rising U.S. Dollar along with falling prices for certain major commodities have kept pressure on precious metals for several months. At the same time, many analysts have found it difficult to interpret the technical picture for metals. The lack of a forceful bounce after autumn 2014 has led some analysts to conclude the decline has farther to run. In this environment, an additional source of information can give a decisive edge to the observant trader.
Other articles we have published here in recent months offer a technical case for gold and silver to climb in a corrective move into approximately the middle of 2015. That remains our primary scenario, and we believe the next upward leg of the correction is due to begin soon. We base our conclusion partly on the apparently complete Elliott wave structures in both gold and silver as counted downward from the 2011 highs. However, an additional factor is due that may lend fuel to a metals rally - an expected corrective retracement in the price of the U.S. Dollar.
It is no surprise that changes in the price of a commodity coincide with changes in the value of the currency that is used as the basis for pricing. However, we believe traders often overlook the additional forecasting power that comes from applying technical methods simultaneously to both the commodity and the currency. Much of the advantage lies in being able to identify pattern completion in one issue to assess the chances of continuation or reversal in the other issue.
Here we juxtapose weekly charts for silver futures and the U.S. Dollar Index. The numbered areas on each chart mark significant turns that coincided across both markets.
It is important to note that the magnitude of the move after each turn does not always match across the two charts. That may be one of the reasons why this timing technique does not receive more attention. However, we believe the real advantage lies not in using one market to predict the strength of a move in the other market. Rather the advantage comes from being able to identify cases where the completion of a pattern segment on one chart is likely to correspond to a similar completion on the other chart.
We have devoted our most recent eBook to identifying trading opportunities that may come up in precious metals and currencies during the next few months. At present, the U.S. Dollar Index appears to be near the end of a powerful third wave moving up from the low of early 2014. The index has pushed through our initial extension targets for the rally, but we expect resistance to increase between the current area and levels near 101.88.
A fourth-wave correction in the Dollar could bring the index down by five percent or more and could last until mid-summer. We expect that to coincide roughly with an upward leg of the corrective move in silver which could take price into the low 20s or perhaps even beyond. The resistance levels and a possible path forward for the Dollar Index are detailed in a separate chart at our website.