Gold Bull Market Strengthens as US Dollar Flirts with Long-term Breakdown

| February 18, 2011

Gold closed moderately higher for the week, reacting further off of long-term uptrend support and moving up toward recent all-time highs. Technical indicators continue to repair themselves following the correction in January and are now slightly bullish overall, tentatively supporting a continuation of the secular bull market.

The move higher this week has also confirmed that the latest intermediate-term cycle low (ITCL) occurred 3 weeks ago, forecasting 2 to 3 months of gains along with a likely breakout to new all-time highs during the next 4 to 6 weeks.

Meanwhile, the US dollar remains on the verge of a significant long-term breakdown. We have been monitoring the development of a symmetrical triangle on the monthly chart of the US dollar index since 2009.

This technical pattern signifies indecision, but a formation breakout or breakdown usually results in a powerful move in the direction indicated, as the coiling action builds tension until the next trend begins. Buyers move the price up to resistance and sellers move the price back down to support, and then that cycle repeats itself. However, every time one side of the market takes price action in its direction of choice, the move is smaller. In a sense, both sides are digging in psychologically. A battle line is effectively drawn, and although neither side is sure which way the trend will head next, the participants aren’t willing to give up on their respective beliefs with regard to future direction. The tension continues to build as the pennant winds down into a smaller and smaller range, before prices finally move out of the formation decisively, causing the “winning” side of the market to gain confidence and the “losing” side to become disheartened. Thus, the move tends to gain significant momentum in the direction of the break and a powerful new trend is born.

Returning to the symmetrical triangle on the US dollar index monthly chart, the last rebound in late 2010 failed to advance into the upper half of the formation before quickly returning to uptrend support. A monthly close well below the lower triangle boundary near 77 would constitute a formation breakdown and forecast a relatively quick move down to previous long-term lows in the 72 area. Watch the index closely during the remainder of February for this potentially bearish development.

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Category: Commentary, Market Update

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