Gold Ignores Strong Dollar On The Short Term Timeframe

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Gold remains within a large consolidation on the weekly chart, but the yellow metal is making some bullish waves with a surge on the daily chart. The first cart below shows weekly Spot Goldcrossing the 1300 level at least a dozen times since June 2012 (pink line). Overall, I still view this is a consolidation within a downtrend, and a consolidation within a trend is typically a continuation pattern. This means the consolidation is a bearish continuation pattern. Also note that it is possible that a bearish descending triangle is taking shape. The lower highs show selling pressure coming in at lower price points. The equal lows represent the demand line. A break below support would break demand and signal a continuation lower. I am marking long-term resistance in the 1350 area and would turn bullish on a close above 1360.



Shorter term, gold is at an interesting juncture because of a big wedge little wedge situation. Erin Heim featured this wedge breakout in the blog on Thursday and I echo her bullish sentiments. The second chart above shows gold breaking out of the big wedge and then pulling back with a smaller wedge in July. This pullback retraced 62% of the prior advance with a move to 1280. Both the retracement amount and pattern are typical for corrections, which means the breakout signals a continuation of the prior advance. The breakout is bullish until proven otherwise and chartists can mark support at 1280, a break of which would totally negate this bullish assessment.

Fundamentally, gold may be breaking out because the situation with Russia is deteriorating. Note that gold surged even as the Dollar advanced this week. While I do not expect Putin to back down, the situation could turn into a long drawn out affair and the Dollar may be the ultimate arbiter for gold. The chart below shows the Euro Index in a clear downtrend and the Dollar Index in an uptrend. The Euro is around 57% of the Dollar Index and the key currency cross to watch. As the weekly gold chart showed, there is a strong negative correlation between gold and the Dollar. Continued Dollar strength and Euro weakness, therefore, could ultimately be negative for gold. Because it is rather unusual to see both gold and the Dollar advance, further strength in both would signal that something is amiss in the world and I would view this as negative for stocks.


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