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US Dollar Reaches Long Term Technical Support Level at Trader’s Narrative

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:

us dollar index long term support.png

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9 Responses to “US Dollar Reaches Long Term Technical Support Level”  

  1. 1 Jimmy

    actually in rare cases the dollar and gold will rally together. i believe that Carl Swenlin at has a Dollar Gold valued chart (where $USDollar x $USGold are multiplied to generate the chart) to validate the long term secular bull market for gold.

    both the dollar and gold rallied in 2005 to 2006. from there they de-coupled. dollar tanked and gold consolidated. his dollar gold chart was in a consolidation after its 2005-2006 rally. presently if the dollar rallies then that should validate gold current potential move to break out of it consolidation. thus gold and gold stocks are starting tp move higher along with the equity stock market.

  2. 2 Tom the Burninator

    According to my research, the Dollar and Gold are directly correlated till about 89 on the USD index, after that they’re inversely linked.

    I posted a curve of the relationship here:

  3. 3 Babak

    Jimmy, I have a hunch that the secular bull market for gold is over.

    Thanks Tom, interesting stuff.

  4. 4 Jimmy

    i have no position in gold nor gold stocks, so i’m unbias looking at these two. this is what i see…

    1) for gold futures contracts, the big boy commercials has been 9 straight weeks below their long term (since jan.2000) averaged short/long ratio positions. this has been consistently bullish for the intermediate term trend.

    2) for gold/silver stocks, the xau gold index has been consolidating around the long term support level of xau/gold ratio for most of this year. this past week it has rallied higher and broke above the downtrend resistance line going back from the early 2006 top for the xau/gold ratio.

    currently gold has been modestly moving higher but during intermediate term bull markets the gold indexes usually rockets higher first. this is evidenced by the xau/hui/gox making new 52 weeks highs. though they still need to break above the may 2006 high/top.

    for gold, it usually lacks at the beginning…and it then does it best before topping right after the gold stock indexes already had topped several weeks earlier.

    Babak, hope this info. helps. this my trader mentality perspective.

    i am thinking about buying some silver stocks but been busy looking at tech stocks.

  5. 5 Babak

    Jimmy, thanks for the analysis. You’re right about the COTs. I prefer to use HUI instead of XAU because it is the only real pure gold index. I agree that gold has to catch up with the equities, otherwise the move is over.

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