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The US dollar has fallen to its long term support. And I do mean long term (see chart below).
Since the early 1990’s it has approached this level 5 other times. In all but one case, it has reacted by bouncing off support.
The exception was in 1992 when for a short time the index breached the 80 “line in the sand”. But it then bounced above and went on to rise much higher. A classic bear trap.
Right now we are still above 80. History is our guide but anything can happen in the markets. We could bounce higher, we could go lower or we could just sit here at these levels for a while.
What I’m going to be watching is sentiment. Keep a watchful eye for negative articles or even better headlines and cover stories about the dollar. Or about the debt held by China.
The best contrarian signal the longs could hope for would be a very negative cover story in a general interest magazine like Time or Newsweek. Maybe Business Week will pull through as it has so many times.
Since the dollar and gold are intricately linked, any bounce for the dollar here will be the final nail in the coffin for the gold sector. But then again, that massive consolidation in the Phili Gold index (HUI) could turn out to be a bull flag. I doubt it. But who knows.
Click to Enlarge Graph:
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