US Dollar and Gold Experience Cycle Inflection Point Setups

| April 2, 2011

The US dollar index is now 21 weeks into the intermediate-term cycle following the intermediate-term cycle low (ITCL) in November 2010 and the next low will likely form sometime during the next few weeks, if it has not already. Both price oscillators experienced bullish crossovers this week, generating a cycle low setup.

A subsequent weekly close above 76.20 would generate a confirmed cycle low signal and indicate that the latest ITCL likely occurred last week. As we noted in the latest big picture update, the index closed below the lower boundary of the symmetrical triangle formation last month, signaling a potential long-term breakdown and continuation of the secular decline from 2002.

It will be important to monitor the development of the rally off of the forthcoming ITCL, as a weak reaction followed by a quick return to recent lows would confirm the long-term breakdown and forecast additional losses. Alternatively, a strong move higher during the next two months would return the index to the symmetrical triangle formation and once again suggest that long-term direction is in question.

While the US dollar index experienced an intermediate-term cycle low setup, gold experienced a corresponding cycle high setup.

Gold has been struggling to break out to a new all-time high during the past month, and a close below $1,418 next week would generate a confirmed cycle high signal and indicate that an intermediate-term cycle high (ITCH) likely occurred this week. We also continue to monitor a negative divergence between the Gold Currency Index (GCI) and gold in US dollar terms. Momentum is still holding at recent lows in positive territory on the GCI weekly chart, but renewed price weakness would cause momentum to break down to a new low, further supporting the development of a substantial correction or extended period of consolidation.

With respect to the bullish scenario, a weekly close well above current levels would reconfirm the gold secular bull market and forecast additional gains. The warning signs that have developed during the past several weeks, which now include an intermediate-term cycle high setup, continue to suggest caution. The bullish and bearish scenarios are equally probable at the moment, but the next meaningful short-term move will likely shift the odds solidly in favor of one outlook.

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Category: Commentary, Market Update

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