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The Dollar - It's Now or Never...

The dollar has had a good year - so far - and many mainstream financial publications have waxed lyrical about the future of the greenback, this despite the fact that it is being diluted at a staggering rate.

Technically, the dollar has now reached a major crossroads - it either breaks higher quickly, or else a serious decline is in prospect.

The 5-year chart for the dollar index shows the preceding bear market from early 2002 in its entirety and the substantial advance this year which broke the index out of the long-term downtrend. Although this advance has succeeded in swinging the moving averages into bullish alignment, it has clearly run into trouble at an important resistance level towards the top of the large trading range that ran from about March to October last year.

The 1-year chart shows the action this year in much more detail. On this chart we can see the strong advance in May and June, which stalled out in July beneath a zone of heavy resistance. A "Distribution Dome" formed beneath the resistance and it then reacted back towards its 200-day moving average before making another run at this resistance, and stalling out again at the same level in October, with another Distribution Dome forming, thus marking out a potential bearish "Double Top" formation. At the time of posting, about 2 pm on the 3rd, the dollar is up about 0.40 and flirting with the 90 level again.

Notwithstanding the bullishly aligned moving averages, this is overall a very bearish picture for the dollar. It either breaks higher very soon now or the second Distribution Dome will force it lower at an accelerating rate, especially as once it becomes obvious to the market that the second attempt to take out the key resistance has failed, selling pressure will intensify. The support levels shown can be expected to provide temporary relief on the way down, and the best hope for the dollar, if it goes on to break down from here, as is considered much more likely than an upside breakout, is that it finds support at the first level and goes on to complete a massive Head-and-Shoulders bottom, with the left shoulder being the low in early 2004, the Head being the low late last year and early this year, and the neckline of the potential formation being the key resistance at 90.5 - 92. If this support level fails, it will be very bad news for the dollar.

It hardly needs mentioning that the outlook for gold and silver, if the dollar breaks down from here as expected, is very rosy indeed. Gold is now rising in other currencies, most notably the Euro, but if the dollar gets the rug pulled out from under it, gold can be expected to soar.

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