Which way from here?

Looks like there are some interesting crossroads coming up....

First, USD:

1. 2009 bearish trend was broken mid December, which started a bullish reversal. The fact that the dollar broke the 200d MA is significant--at least for now. It suggests a good amount of momentum. Remember around this time fears of sovereign default became more serious. The flight to safety trade gained momentum.

2. We're coming up to a test of the lower trendline and 200d MA on the dollar index. This is a key level. If we see a strong break below, odds are that the dollar safety trade is off and a resumption of the dollar bear & risk trades are back on. BUT...if it tests and resumes higher, we may see continued stagnation in the risk trades (equities, metals, commodities). Look to see what happens on the UUP (dollar proxy) around 23.00 to see if it holds.



Next, gold:

It always amazes me how long obvious destinations take to play out. Impatience is rarely rewarded in trading and investing. I think all "real money" advocates out there know that downside on gold is very limited and upside is enormous. That said, we have to let nature take it's course.

Gold had a nice breakout of $1000 up to $1224, but the rally stalled. I think everyone expected a higher move to $1300-1350 before the stall, but as always...the trend is our friend.

1. On a weekly chart, gold still looks a tad overbought and I wouldn't be surprised to see more treading or weakness for another few weeks. Trendline at 1000 looks strong. I would LOVE to see a retest of support at $1000-1050 and would be putting on a healthy position if it retests.

2. That said, sometimes the train leaves the station early. I think everyone saw the declining wedge pattern that indicated continued bullishness on the breakout. We'll need to see if that breakout holds or if it may tread water while waiting for the trendline to catch up.



3. Sometimes it's amazing how charts always look crystal clear in hindsight. The image above looked like a perfect wedge breakout in gold. What if it looks more like this?



I'm not going to attempt to predict short term patterns because the hit rate is notoriously low. But the larger trend in gold and the dollar is still intact. I think we'll see some fireworks in gold before the year is out. If we see a resumption in the dollar slide, hold onto your asses ladies and gentlemen.

Gold, the USD and rubber bands

In a prior life I was a sports conditioning professional. Whenever I had athletes who needed to run faster on the field, one of the drills involved giant rubber bands...



The athlete straps into the tubing and starts running as fast as possible while the coach holds the athlete back from top speed while being "dragged" in the same direction. About halfway through the drill, the athlete is "released" from the tubing and hits full speed in an explosive way. After the release, the coach falls back in the opposite direction.

So what does this have to do with gold and the USD?

Simple.

For the last 2 weeks, both gold and the USD have been rallying which seems to defy logic since they are typically negatively correlated assets. What this tells us is that the underlying strength of gold is immense since it's rallying in the midst of a rising dollar.

In effect, the USD is acting as the rubber band on a forward running gold price. If we see a continuation of this trend, it makes a spectacularly bullish case for gold. Why? Fundamentals tell us the USD is in long-term decline and will continue its decline once the flight-to-safety trade is over.

When the dollar decline resumes, gold is likely to cut loose from the "rubber band" that's been holding it back from explosive new highs. I suspect we'll continue to see USD and gold rally together but for how long is anyone's guess.

The longer they rally in tandem, the more spectacular gold's rise will be when the USD drops again. Watch this "race" closely and look for the rubber band to break loose.

When it does we just might witness one of the fastest sprinters in recent memory.